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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to _______
COMMISSION FILE NUMBER 0-21078
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UNION BANKSHARES, LTD.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 84-0986148
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1825 LAWRENCE STREET, SUITE 444
DENVER, COLORADO 80202
(Address of principal executive offices)
(303) 298-5352
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
Union Bankshares Capital Trust I 9% Cumulative Trust Preferred Securities
and the Guarantee of Union Bankshares, Ltd. with respect thereto
(Titles of classes)
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Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
X
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The Registrant's gross revenues for the fiscal year ended December 31,
1999 totaled $25.8 million.
The aggregate market value of the voting stock of the registrant held by
non-affiliates, based on a closing price of $9.25 per share as of March 27,
2000, was approximately $9,795,334.
As of March 27, 2000, there were outstanding 2,376,198 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than April 29, 2000, are incorporated by reference into
Part III as specified.
Certain Exhibits to this Annual Report on Form 10-KSB have been
incorporated by reference. See Index to Exhibits on Page E-1.
Transitional Small Business Disclosure Format (check one) Yes No X
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<PAGE>
UNION BANKSHARES, LTD.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business............................................................1
Item 2. Properties.........................................................27
Item 3. Legal Proceedings..................................................29
Item 4. Submission of Matters to a Vote of Security Holders................29
PART II
Item 5. Market for Common Equity and Related Shareholder Matters...........30
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................31
Item 7. Financial Statements...............................................43
Item 8. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure...............................................44
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..................45
Item 10. Executive Compensation.............................................45
Item 11. Security Ownership of Certain Beneficial Owners and Management.....45
Item 12. Certain Relationships and Related Transactions.....................45
Item 13. Exhibits and Reports on Form 8-K...................................46
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<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
Union Bankshares, Ltd. (the "Company") is an independent bank holding
company whose predecessor was incorporated as a Colorado corporation in 1984.
The Company was reincorporated in Delaware in 1992. The Company's principal
asset is the common stock of Union Bank & Trust (the "Bank"), a state chartered
commercial bank located in Denver, Colorado. The operations of the Bank and its
predecessors date back to 1917. The Company acquired the Bank in 1985. The Bank
attracts FDIC-insured deposits, and focuses on providing relationship banking
based on personal attention and professional service to small and medium-sized
businesses and individuals. This operating strategy has resulted in sustained
growth in the Bank's asset and deposit base and loan portfolio, with strong
operating results.
The Bank has maintained its emphasis on asset quality and capital
preservation by following conservative loan underwriting standards that have
allowed it to avoid excessive loan losses. The Bank's ratios of nonperforming
assets to capital and to total assets were 0.04% and 0.00%, respectively, at
December 31, 1999.
On March 17, 2000, the Company announced that it and Gold Banc Corporation
Inc. ("Gold Banc") had mutually agreed to terminate their merger agreement
pursuant to which Gold Banc would have acquired the Company. The Company also
announced that it would repurchase up to 200,000 shares of its Common Stock in
open market or privately negotiated transactions.
The Company continues to seek to take advantage of the opportunities in
the Colorado banking market which have resulted from the relaxation of
historical regulatory limitations on branch banking. In addition, recent
acquisition activity in the industry has led to lapses in coverage of different
customer needs and reduction in customer services, as well as disruption of
existing account relationships. The Company believes that this continues to
afford the Bank an opportunity for internal growth through attracting new
customers and quality personnel with existing customer relationships.
The Company's strategy for growth (see "Growth Strategy") is based
primarily on the development of branches that are strategically located around
the Denver metropolitan area to serve the Bank's focus market of small and
medium-sized businesses and individuals. The Company has opened five branches in
the last several years, the first in the Lakeside area in July 1994, the second
in the University Hills area in March 1995, the third in the Lakewood area in
December 1995, the fourth in the Littleton area in May 1998 and the fifth in the
Golden area in October 1998. Each of these are full service branches, having the
appearance of stand alone banks. In addition, the Company acquired Lakewood
State Bank in December 1998 and established it as the Company's sixth branch.
The Company views the acquisition of Lakewood State Bank as an opportunistic
enhancement of its branching strategy. The Company continues to analyze
opportunities to open additional full-service branches in the metropolitan
Denver area, subject to identification of an appropriate market and branch
location, negotiation of an acceptable lease and approval of the various
regulatory bodies and branching restrictions under Colorado law. The Company
will also assess additional acquisition opportunities as they present
themselves. See "Supervision and Regulation."
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995" for a discussion of matters regarding
forward-looking statements in this Form 10-KSB.
<PAGE>
OPERATING STRATEGY
The Company's strategy as an independent, one-bank holding company has
been carried out through the operations of the Bank and, since 1994, its
branches. The Bank, since its acquisition by the Company in 1985, has emphasized
local relationship banking for the small and medium-sized business and
individuals. The Bank's operating strategies include:
o Personal Attention and Professional Service
o Maintaining Asset Quality
o Asset/Liability Management
The Company's branching efforts are structured to continue to build on the
three strategies outlined above. The Company has located its branches in areas
that produce a similar customer base to that of the Bank, has encouraged
community participation at each branch, has developed transparent communication
and data delivery systems, and has retained employees familiar with both the
Company's operating philosophies and the community's needs. The Bank, through
its branches, supports local community events through employee volunteers and
sponsorships.
Personal Attention and Professional Service. The Bank's customer-oriented
strategy is one of providing customers with personal attention and professional
service by involving all employees in developing and carrying out the customer
service program. The Bank's executive management team believes that by providing
all employees an open opportunity to communicate their ideas to management, and,
if appropriate, implementing them, it can refine and improve the operation of
the Bank.
This employee involvement led to new product and service introductions
this year though the employee Product Development Committee and our continued
efforts in the "Officer Call" program. Under the Bank's Officer Call Program,
which was implemented in 1986, lending officers call on existing customers and
prospects on a regular basis. At these meetings, the officers seek to develop a
better understanding of the business issues faced by the customer, and can
discuss services which the Bank can provide to help them address their needs.
The Bank also requests customer feedback on customer communication pieces such
as direct mail pieces, mailings in monthly statements and through the Bank's
recorded on-hold message system. Customers are encouraged to speak (or write)
freely with respect to both positive and negative aspects of the Bank's service.
The Bank also surveys each customer who opens a new account, whether they are a
new customer or an existing customer, to check on the level of service they
received, and secondarily to solicit information that might help the Bank
identify unmet product needs and cross-sell additional services.
As an additional means of encouraging customer communication, the Bank has
held luncheons with both new customers to the Bank and long-time customers. The
purpose of these luncheons was to introduce the Bank, its direction, service
philosophy and to solicit feedback. In 1999, the Bank held its third Speakers
Conference and attracted 340 attendees.
Management believes that its policy of employee involvement, which it
refers to as its "staff to management" philosophy, has resulted in the
relatively low turnover experienced by the Bank at all levels of employment.
Management believes that this enables the Bank to provide continuity of service
by the same staff members, leading to long-term customer relationships, high
quality service and quick response to customer needs.
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<PAGE>
The Bank emphasizes education and training for its staff to achieve high levels
of customer service. This last year, customer service line employees attended
the intensive Stickler Customer Service Training Course. The Bank also
encourages and provides for training in outside accredited programs.
Maintaining Asset Quality. The Bank has emphasized asset quality
through its conservative lending policy rooted in relationship banking. The Bank
generally is not a transaction-by-transaction lender, preferring instead to
develop a full banking relationship with its loan customers. This philosophy has
led to generally positive loan loss experience and low ratios of nonperforming
assets to total assets. See "Nonperforming Assets."
Asset/Liability Management. The Bank's asset/liability management policy
is designed to manage the risk/return relationships between capital adequacy,
market risk, liquidity and interest rate risk. A substantial component of this
policy is to protect the Bank's portfolio from undue interest rate risk.
Exposure to interest rate risk arises from volatile interest rates and changes
in the Bank's balance sheet mix. The Bank's policy is to control the exposure of
its earnings to changing interest rates by generally maintaining a position
within a narrow range around an "earnings neutral position," which is defined as
the mix of assets and liabilities that generate a net interest margin that is
least affected by interest rate changes. See "Item 6 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset/Liability
Management."
GROWTH STRATEGY
The Company has analyzed several potential bank acquisitions during the
past five years and until the acquisition of Lakewood State Bank, discussed
below, chose not to finalize such potential acquisitions due to the heightened
price expectations of sellers in the Colorado market which have been brought
about by the purchase of local banks by out-of-state and, in some cases,
in-state banking groups at historically high multiples of book value. The
Company intends to continue to analyze potential acquisitions in the Denver
metropolitan area, as well as other areas in Colorado, but will more
aggressively pursue its branching strategy.
The Company has focused on growth as an independent entity and adopted an
aggressive internal growth strategy through establishing full-service branches
in locations in the Denver metropolitan area that will reach the small and
medium-sized businesses in each location. The Bank's six existing full-service
branches are structured to provide complete banking services in each location
and each branch is headed by a branch president or branch manager with
responsibility and authority to service the banking and lending needs of the
local business. This structure compliments the Bank's philosophy of
customer-to-staff-to-management direction so that the Bank responds to customer
input rather than the customer being asked to respond to the Bank without having
the opportunity to give input.
In July 1994, the Bank opened its first branch in the Lakeside area of
metropolitan Denver. Since then, the Bank has opened branches in the University
Hills area in March 1995, the Lakewood area in December 1995, the Littleton area
in May 1998 and the Golden area in October 1998. In addition, the Bank acquired
Lakewood State Bank in December 1998, which the Bank developed into its sixth
branch and is operating such branch as Union Bank & Trust Southwest. Each of
these branches have been well-received by its respective community. The
following table sets forth the deposits attracted and the loans made by the Bank
and each of its six branches as of December 31, 1999.
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<PAGE>
DECEMBER 31, 1999
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DEPOSITS LOANS
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(DOLLARS IN MILLIONS)
Main $ 141.4 $ 93.8
Lakeside 30.6 8.6
University Hills 19.9 7.6
Lakewood 47.5 47.6
Littleton 7.9 8.2
Golden 6.4 2.8
Southwest 36.3 16.0
========= ==========
Total $ 290.0 $ 184.6
On December 17, 1998, the Company acquired Lakewood State Bank in a
cash-for-stock merger in which the shareholders Lakewood State Bank received a
total of $8.35 million in cash and Lakewood State Bank was merged with and into
the Bank. Management believes that the operating philosophy of Lakewood State
Bank is consistent with the Bank's and that the combined bank will be able to
operate effectively in the Denver marketplace. With the addition of Lakewood
State Bank's approximately $42 million in assets, the Bank had approximately
$315 million in total assets at December 31, 1998.
To accommodate the Company's anticipated growth, management intends to
continue to recruit additional high-quality personnel and enhance its internal
management systems. Management believes that such personnel and systems are
necessary if the Company is to achieve its growth strategy without compromising
its customer-oriented approach to banking and its commitment to maximize asset
quality. Further, the recent consolidation in the Colorado banking industry has
resulted in the availability of a large number of quality personnel with
long-standing customer relationships. There can be no assurance, however, that
the Company will achieve its growth objectives.
ECONOMIC ENVIRONMENT IN MARKET AREAS SERVED
The Company's principal market for loans and deposits is the greater
Denver metropolitan area. The Bank has benefitted from the recent strength in
the metropolitan Denver economy. The metropolitan Denver economy's strength is
believed to reflect its diversification from its prior dependence on the oil and
gas industry, with strong contributions from the manufacturing,
telecommunications and government sectors. Total employment, retail sales and
home sales have all been healthy in recent years, while apartment vacancy and
commercial office vacancy rates have generally declined.
As with the metropolitan Denver economy, the Colorado economy has become
more diversified over the past decade. An increase in tourism and international
trade, together with growth in small manufacturing and high technology
industries, has broadened the economic base of Colorado. Although the Company
anticipates continued economic growth in metropolitan Denver and in Colorado,
there can be no assurance that growth will continue at or near the rates
recently experienced.
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<PAGE>
LENDING ACTIVITIES
General. The Bank provides a range of commercial and retail lending
services, including, but not limited to, commercial business loans, commercial
and residential real estate construction loans, commercial and residential real
estate mortgage loans, loan participations, consumer loans, revolving lines of
credit, and letters of credit. Currently, the primary focus of the Bank is on
commercial business lending to small and medium-sized businesses. The Bank
places a strong emphasis on asset quality, and maintains conservative
underwriting standards. The Bank monitors the concentration of its loan
portfolio in an effort to avoid over-allocating its funds available for lending
to any particular industry sector.
The Bank is not normally a transaction lender and generally requires a
full banking relationship with its commercial customers. The Bank seeks to
continually develop and maintain its strong community orientation by, among
other things, considering the interests of its existing and potential customers
in the Denver community. In particular, primary consideration is given to
customers with interests in the Bank's and branches' surrounding communities,
including the areas located within a five-mile radius of the Bank's main
location and a three-mile radius of the branch locations.
The Bank's loan officers have an average of over 15 years lending
experience and are committed to the lending profession. The loan officer staff
includes 3 past presidents of the Rocky Mountain Chapter of Robert Morris
Associates (the national organization of bank credit officers).
Loan Portfolio Composition. The following table sets forth the composition
of the Company's loan portfolio by type of loan, aggregate dollar amount and
percentage of total loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- ------------------- ------------------ -------------------- -------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- ------- --------- -------- --------- ------ ---------- -------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans....... $ 133,978 73.7 $ 105,618 73.1 $ 87,929 72.1 $ 70,631 71.4 $ 54,488 68.2
Real estate-
construction loans.. 22,012 12.1 12,881 8.9 9,625 7.9 5,758 5.8 5,064 6.3
Real estate-
mortgage loans...... 5,780 3.2 4,101 2.8 4,297 4.5 5,489 5.5 7,975 10.0
Consumer loans......... 22,855 12.6 24,595 17.0 20,933 17.2 18,854 19.1 13,785 17.3
---------- ------- --------- -------- --------- ------ ---------- -------- --------- -------
Total........... 184,625 101.6 147,195 101.9 122,784 101.7 100,732 101.8 81,312 101.8
Less allowance for
loan losses........ (2,892) (1.6) (2,678) (1.9) (2,125) (1.7) (1,754) (1.8) (1,448) (1.8)
---------- ------- --------- -------- --------- ------ ---------- -------- --------- -------
Loans receivable, net.. $ 181,733 100.0 $ 144,517 100.0 $ 120,659 100.0 $ 98,978 100.0 $ 79,864 100.0
========== ======= ========= ======== ========= ====== ========== ======== ========= =======
</TABLE>
Commercial Loans. Commercial lending is the Bank's primary focus and the
strength of its lending activity. The Bank's areas of emphasis include, but are
not limited to, loans to building contractors, wholesalers, manufacturers,
business services companies and energy-related businesses. The Bank provides a
wide range of commercial business loans, including lines of credit for working
capital purposes and term loans for the acquisition of equipment and other
purposes. Collateral for these loans generally includes accounts receivable,
inventory, equipment and real estate. Where warranted by the overall financial
condition of the borrower, loans may be made on an unsecured basis. Terms of
commercial business loans generally range from one to five years. The majority
of the Bank's commercial business loans have floating interest rates. Commercial
loans outstanding were $134.0 million at December 31, 1999 compared to $105.6
million at December 31, 1998. Many of the
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<PAGE>
Bank's commercial loans are extended to small business customers. These clients
are composed of a variety of manufacturers, wholesalers, retailers, commercial
contractors and service companies. The primary repayment risk is the failure of
the business due to economic or financial factors. In most cases the Bank has
taken security and receives personal guarantees to help assure an alternative
source of repayment.
Real Estate Construction Loans. The Bank originates single family and
multi-family residential construction loans to builders who have demonstrated a
favorable record of performance with the Bank or within the Bank's known service
area on both a pre-sold and spec basis. Homes built without a specific buyer are
limited to specific concentration guidelines and factors set from time to time
by Bank management.
The Bank is also actively involved in providing commercial construction
financing to both existing and new customers. The Bank will normally require a
binding commitment for permanent financing from either the Bank or another
lender.
The Bank also provides acquisition and development, land and lot loans
using conservative underwriting guidelines and specific concentration benchmarks
in relation to capital set from time to time by Bank management. A variety of
risks are present in construction loans, including the failure of the contractor
to complete the work and the borrower's inability to pay. The Bank carefully
monitors construction draws and inspects each property frequently to insure the
work is being completed as specified. In addition, construction loans generally
are made where a conservative loan-to-value ratio exists. These loans are
frequently backed by personal guarantees and other collateral that provide an
alternative source of repayment. The Bank further attempts to limit its risk
through adherence to conservative underwriting procedures and by using only
state licensed or certified appraisers on all loans above $250,000. The Bank's
real estate construction loans outstanding were $22.0 million at December 31,
1999, compared to $12.9 million at December 31, 1998. This represents a somewhat
higher percentage of total loans outstanding (11.9% in 1999, compared to 8.9% in
1998), which reflects the high amount of construction activity in the Denver
market.
Real Estate Mortgage Loans. The Bank generally restricts its commercial
real estate lending activity to owner-occupied properties or to investor
properties that are owned by customers with which the Bank has a complete
banking relationship. Therefore, many loans classified as commercial real estate
loans could be characterized as ordinary commercial loans which are secured by
real estate.
Commercial real estate loans are generally made at floating rates and for
maturities ranging from five to ten years. The Bank's underwriting standards
generally require that the loan-to-value ratio not exceed 75% of appraised value
or cost, whichever is lower. Management does not believe that the Bank's
existing commercial real estate loan portfolio represents a material risk of
loan losses.
The Bank can originate SBA real estate loans on owner occupied properties
where the maturities may be up to twenty five years, and the loan-to-value ratio
may reach 90% of appraised value or cost, whichever is lower. These loans are
guaranteed from 75% to 80% of the amount of the loan by the Federal government.
The primary risks of real estate mortgage loans include the borrower's
inability to pay and deterioration in the value of the real estate that is being
held as collateral. The Bank also originates residential mortgage loans on a
limited basis as a service to its customers. On those loans that are extended,
the Bank attempts to have conservative loan-to-value ratios, personal
guarantees, a strong history of debt servicing capability, fully amortizing
terms over twenty-five years or less with the majority of these having a balloon
maturity of ten years or less, and alternative collateral if necessary.
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<PAGE>
From time to time, the Bank purchases loans from a locally owned mortgage
company until the mortgage company sells the loans into the secondary mortgage
market. The loans are then sold back to the mortgage company. Initially, the
Bank receives interest during its holding period of prime plus .50%. All
origination fees and interest on the loan in excess of the rate payable to the
Bank are retained by the mortgage company. If the mortgage is not sold within
specified periods, the Bank is entitled to receive all of the interest paid on
the mortgage from inception and may be entitled to receive all or a portion of
the origination fees. The mortgage company provides loan servicing during the
period that the mortgage is held by the Bank. During the years ended December
31, 1999, 1998, and 1997, the Bank earned interest income on such loans of
$28,000, $144,000, and $59,000, respectively. During the years ended December
31, 1999, 1998, and 1997, the Bank purchased loans in the amounts of $9.4
million, $48.4 million and $5.8 million and sold loans in the amounts of $13.7
million, $44.1 million and $4.5 million. All loans sold back to the mortgage
company are without recourse to the Bank.
These loans carry the same risks as any other real estate mortgage loan.
However, in most cases, the Bank bears these risks for only a short period. As a
general matter, the loans are presold and remain in the Bank's portfolio for an
average of less than 30 days. The Bank has not, to date, retained any of these
loans. Mr. Zueck, the Chairman of the Board of the Bank and President and a
director of the Company, is a director and Treasurer of the mortgage company.
Consumer Lending. The Bank provides a full range of consumer loans. The
primary risk of consumer lending relates to the personal circumstances of the
borrower. The Bank provides as a service to its business customers and their
employees the choice of dealing with the same loan officer for consumer and
business matters. This service has been well received by new business customers
and their employees who, in dealing with large holding company banks, have
frequently had to deal with a variety of different officers for different types
of transactions. Consumer loans outstanding were $22.9 million and $24.6 million
at December 31, 1999 and 1998, respectively. The branches have a higher ratio of
consumer loans to commercial loans than the main Bank has historically
experienced. Management expects that this will continue in the future.
Commitments and Contingent Liabilities. In the ordinary course of
business, the Bank enters into various types of transactions that include
commitments to extend credit as described in Note 11 of the Notes to
Consolidated Financial Statements. The Bank applies the same credit standards to
these commitments as it uses in all its lending activities and has included
these commitments in its lending risk evaluations. The Bank's exposure to credit
loss under commitments to extend credit is represented by the amount of these
commitments. It is management's policy not to commit to extend credit at below
market interest rates.
Credit Authority and Loan Limits. All loans, credit lines, and letters of
credit are subject to the same approval procedures and amount limitations. These
limitations apply to the total outstanding indebtedness of the borrower to the
Bank, including the indebtedness of any guarantor. All individual or aggregate
credits in excess of $100,000 must be preapproved by the Bank's Loan Committee,
with certain limited exceptions. The Bank allows certain senior loan officers
the flexibility, based on their experience and the individual loan customer they
are working with, to advance, without preapproval, up to $50,000 per request,
with a limit of $100,000 per twelve-month period, to that customer, even if that
customer's aggregate credits are over the $100,000 limit prior to the request.
Any advance made under these conditions are then required to be ratified at the
next regularly-scheduled Loan Committee meeting. The Loan Committee consists of
the Bank's Chairman of the Board, Herman J. Zueck, its Vice Chairman, Jerrold B.
Evans, its President, Charles B. Worthington, its Executive Vice President, Fred
I. Artes, and the outside directors of the Bank. A quorum of the committee is a
minimum of four members.
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<PAGE>
Under federal law, permissible loans to one borrower by the Bank are
generally limited to 15% of its unimpaired capital, surplus, undivided profits
and loan loss reserve ($4.0 million at December 31, 1999). The Bank utilizes a
guidepost "house limit" on loans to any borrower of $2,500,000, which has
occasionally been exceeded. The Bank sells loan participations to accommodate
borrowers whose financing needs exceed the Bank's lending limits. Total loan
participations sold as of December 31, 1999 and 1998 were $1,268,000 and
$3,068,000, respectively.
Loan Policy. The Bank's lending activities are guided by its Statement of
Lending Policies and Procedures. These policies are reviewed annually and
approved by the Bank's Board of Directors. The Bank supplements its internal
supervision and audits of its lending operations with independent examinations
performed by professional, experienced consultants and auditors.
NONPERFORMING ASSETS
The Company's nonperforming assets consist of nonaccrual loans,
restructured loans, past due loans and foreclosed assets held for sale. The
following table sets forth information with respect to these assets at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Past due 90 days or more........................ $ 3 $ -- $ -- $ -- $ 82
Nonaccrual loans................................ 4 16 23 14 110
Restructured loans.............................. -- -- -- -- --
------------ ----------- ------------- -------------- ----------
Total nonperforming loans....................... 7 16 23 14 192
Foreclosed assets held for sale................. -- 158 -- -- --
------------ ----------- ------------- -------------- ----------
Total nonperforming assets............. $ 7 $ 174 $ 23 $ 14 $ 192
============ =========== ============= ============== ==========
Ratio of total nonperforming assets to total
assets................................. 0.00% 0.06% 0.01% 0.01% 0.12%
Ratio of total nonperforming loans to total
loans.................................. 0.00% 0.12% 0.02% 0.01% 0.24%
Ratio of allowance for loan losses to total
nonperforming loans.................... 41,314.28% 1539.08% 9239.13% 12528.57% 754.17%
</TABLE>
Past Due, Nonaccrual and Impaired Loans. The Company's financial
statements are prepared on the accrual basis of accounting, including the
recognition of interest income on its loan portfolio, unless a loan is placed on
a nonaccrual basis. Loans are placed on nonaccrual when there are serious doubts
about the collectibility of principal or interest. Amounts received on
nonaccrual loans generally are applied first to principal and then to interest
only if all principal has been collected or principal collection is assured. The
Company's policy is to place a loan on nonaccrual status when the loan becomes
past due for 90 days or more, unless the loan is well secured, is in the process
of being collected and the Bank's Loan Committee has approved maintaining the
loan on an accrual basis, which in practice is rarely done. At December 31,
1999, the Company had $4,000 of loans accounted for on a non-accrual basis
compared to $16,000 and $23,000 at December 31, 1998 and 1997, respectively.
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<PAGE>
Restructured loans are those for which concessions, including the
reduction of interest rates below a rate otherwise available to that borrower or
the deferral of interest or principal, have been granted due to the borrower's
weakened financial condition. Interest on restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal
will occur. The Company had no restructured loans at December 31, 1999, 1998 and
1997, respectively.
Impaired loans, which include non-accrual loans noted above and potential
problem loans, where known information about possible credit problems causes
management to doubt the ability of such borrowers to comply with contractual
repayment terms total $2,985,000 and $2,380,000 at December 31, 1999 and 1998,
respectively. An allowance for loan loss of $450,000 and $362,000 relates to
impaired loans at December 31, 1999 and 1998, respectively. Interest of $261,000
and $158,000 was recognized on average impaired loans of $2,851,000 and
$1,612,000 for 1999 and 1998, respectively.
Foreclosed Assets Held for Sale. Assets acquired by foreclosure or in
settlement of debt and held for sale are valued at estimated fair value as of
the date of foreclosure, and a related valuation allowance is provided for
estimated costs to sell the assets. Management evaluates the value of foreclosed
assets held for sale periodically and increases the valuation allowance for any
subsequent declines in fair value. Increases in the valuation allowance and
gains/losses on sales of foreclosed assets are included in noninterest expense,
net. At December 31, 1999 and 1998, the Company had foreclosed assets held for
sale of $0 and $158,000, respectively.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's recognition of the
risks of extending credit and its evaluation of the quality of the loan
portfolio. The allowance is maintained at a level considered adequate to provide
for anticipated loan losses based on management's assessment of various factors
affecting the loan portfolio, including a review of problem loans, business
conditions and loss experience and an overall evaluation of the quality of the
underlying collateral and holding and disposal costs. The allowance is increased
by provisions charged to operations and reduced by loans charged off, net of
recoveries. Allowances are provided for individual loans where ultimate
collection is considered questionable by management after reviewing the current
status of loans that are contractually past due and considering the net
realizable value of the security and of the loan guarantees, if applicable.
Management believes that the Company's allowance for loan losses is
adequate to cover anticipated losses and is in accordance with generally
accepted accounting principles. There can be no assurance, however, that
management will not determine to increase the allowance for loan losses or that
regulators, when reviewing the Bank's loan portfolio in the future, will not
request the Bank to increase such allowance, either of which could adversely
affect the Company's earnings. Further, there can be no assurance that the
Company's actual loan losses will not exceed its allowance.
-9-
<PAGE>
The following table sets forth information regarding changes in the
Company's allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ------------ ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan losses at
beginning of period.................... $ 2,678 $ 2,125 $ 1,754 $ 1,448 $ 1,071
----------- ------------ ----------- ---------- -----------
Charge-offs:
Commercial loans..................... 7 69 13 17 93
Real estate -- construction loans.... -- 13 -- -- --
Real estate -- mortgage loans........ -- -- -- -- --
Consumer loans....................... 20 4 11 12 13
----------- ------------ ----------- ---------- -----------
Total charge-offs...................... 27 86 24 29 106
----------- ------------ ----------- ---------- -----------
Recoveries:
Commercial loans..................... 9 5 35 50 360
Real estate -- construction loans.... -- -- -- -- --
Real estate -- mortgage loans........ -- -- -- -- --
Consumer loans....................... 5 6 -- -- 3
----------- ------------ ----------- ---------- -----------
Total recoveries....................... 14 11 35 50 363
----------- ------------ ----------- ---------- -----------
Net charge-offs (recoveries)........... 13 75 (11) (21) (257)
----------- ------------ ----------- ---------- -----------
Provisions for loan losses............. 227 278 360 285 120
----------- ------------ ----------- ---------- -----------
Additions to allowance for loan loss(1) -- 350 -- -- --
----------- ------------ ----------- ---------- -----------
Balance of allowance for loan losses at end
of period.............................. $ 2,892 $ 2,678 $ 2,125 $ 1,754 $ 1,448
=========== ============ =========== ========== ===========
Ratio of net charge-offs (recoveries)
to average loans....................... 0.01% 0.06% (0.01%) (0.02%) (0.35%)
Average loans outstanding during the $ 159,684 $ 127,262 $ 113,043 $ 91,586 $ 74,260
period...............................
</TABLE>
- ----------------------
(1) Additional allowance for loan loss resulting from acquisition of Lakewood
State Bank.
-10-
<PAGE>
The following table sets forth the allowance for loan losses by loan
category, based upon management's assessment of the risk associated with such
categories, at the dates indicated and summarizes the percentage of gross loans
in each category to total gross loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- -------------------- --------------------- -------------------- ---------------------
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
AS A AS A AS A AS A AS A
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
OF OF GROSS OF OF GROSS OF OF GROSS OF OF GROSS OF OF GROSS
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- --------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans....... $2,412 72.6% $1,922 71.7% $1,506 70.9% $ 1,293 70.2% $ 1,075 67.0%
Real estate --
construction loans... 73 11.9% 234 8.8% 165 7.7% 39 5.7% 48 6.2%
Real estate --
mortgage loans....... 87 3.1% 75 2.8% 95 4.5% 157 5.4% 164 9.8%
Consumer loans......... 320 12.4% 447 16.7% 359 16.9% 265 18.7% 161 17.0%
--------- --------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Total................ $2,892 100.0% $2,678 100.0% $2,125 100.0% $ 1,754 100.0% $ 1,448 100.0%
========= ========= ========= ========== ========= ========== ========= ========== ========= ==========
</TABLE>
INVESTMENT ACTIVITIES
The Company maintains a securities portfolio comprised primarily of U.S.
government securities, municipal securities and other investment securities. The
Company manages its investment portfolio to (i) maximize safety and soundness,
(ii) provide adequate liquidity, (iii) maximize rate of return within the
constraints of applicable liquidity requirements (with liquidity taking
precedence over return) and (iv) complement asset/liability management policies.
The Bank's Asset and Liability Management Committee, which is made up of the
Bank's Chairman of the Board and Chief Executive Officer, its President, its
Executive Vice President and Chief Operations Officer, its Executive Vice
President of Lending, its Executive Vice President of Finance, and its Senior
Vice President of Information Systems, oversees the Bank's investment portfolio
with the assistance of an outside consultant. The Bank uses a measurement known
as dollar duration to analyze its exposure to interest rate risk. Dollar
duration measures the percentage loss or gain that the portfolio will sustain
with each 100 basis point parallel shift in interest rates. In 1998, the Bank
modestly increased the dollar duration of its portfolio as interest rates
remained relatively steady through the first three quarters, then decreased
slightly in the fourth quarter, and the investments which matured were replaced
with new investments with slightly lower yields and longer maturities. In 1999,
the Bank increased the dollar duration of its portfolio as interest rates
remained relatively steady through the first two quarters, then increased during
the last two quarters, and the investments which matured were replaced with new
investments with slightly higher yields and longer maturities. As a result, the
Bank has a relatively higher exposure to increased interest rates at this time
than at year-end 1998. See "Item 6 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management."
-11-
<PAGE>
The table below provides the amortized cost and fair value of the
Company's investment securities at each of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997
------------------------ -------------------------- --------------------------
AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
----------- ----------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. government agencies
and corporations........ $ 29,176 $ 28,299 $ 21,591 $ 22,080 $ 21,990 $ 22,371
Obligations of states and
political subdivisions.. 3,732 3,834 5,878 6,340 5,939 6,310
----------- ----------- ------------ ------------ ------------ ------------
32,908 32,133 27,469 28,420 27,929 28,681
----------- ----------- ------------ ------------ ------------ ------------
Available for Sale:
U.S. government agencies
and corporations........ 90,071 87,028 54,438 54,704 12,804 12,781
U.S. Treasury securities.. -- -- 3,611 3,659 6,027 6,070
Obligations of states and
political subdivisions.. 23,195 23,052 18,482 19,231 16,981 17,330
Commercial Paper.......... -- -- -- -- 999 999
----------- ----------- ------------ ------------ ------------ ------------
113,266 110,080 76,531 77,594 36,811 37,180
----------- ----------- ------------ ------------ ------------ ------------
Total..................... $ 146,174 $ 142,213 $ 104,000 $ 106,014 $ 64,740 $ 65,861
=========== =========== ============ ============ ============ ============
</TABLE>
The following table sets forth the securities held by the Company which
(other than U.S. government securities) make up more than ten percent of
stockholders' equity:
DECEMBER 31, 1999
--------------------
AMORTIZED
COST FAIR VALUE
--------- ----------
(DOLLARS IN THOUSANDS)
None............................... $ 0 $ 0
--------- --------
TOTAL............................... $ 0 $ 0
========= ========
-12-
<PAGE>
The following tables provide the carrying values, maturities and weighted
average yields of the Company's securities portfolio at the dates indicated.
HELD-TO-MATURITY SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1999 (1)
DUE
AFTER ONE DUE
DUE IN YEAR AFTER FIVE
ONE THROUGH YEARS
YEAR OR FIVE THROUGH DUE AFTER
LESS YEARS TEN YEARS TEN YEARS TOTAL
--------- --------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. treasury securities:
Balance................................... $ 0 $ 0 $ 0 $ 0 $ 0
Weighted average yield.................... 0% 0% 0% 0% 0%
U.S. government securities:
Balance................................... $ 0 $ 0 $ 3,837 $ 0 $ 3,837
Weighted average yield.................... 0% 0% 6.35% 0% 6.35%
Agency Pools (2):
Balance................................... $ 1,572 $ 1,769 $ 1,347 $ 20,651 $ 25,339
Weighted average yield.................... 7.50% 7.74% 7.16% 7.36% 7.39%
Municipal securities - nontaxable (3):
Balance................................... $ 0 $ 0 $ 1,872 $ 1,860 $ 3,732
Weighted average yield.................... 0% 0% 5.38% 6.22% 5.80%
Municipal securities - taxable:
Balance................................... $ 0 $ 0 $ 0 $ 0 $ 0
Weighted average yield.................... 0% 0% 0% 0% 0%
Total:
Balance................................... $ 1,572 $ 1,769 $ 7,055 $ 22,511 $ 32,908
Weighted average yield.................... 7.50% 7.74% 6.25% 7.27% 7.09%
</TABLE>
- ------------------------------------
(1) Based on contractual maturities and, therefore, do not reflect principal
amortization.
(2) Government guaranteed mortgage pools, such as FHLMC, FNMA, and GNMA, which
act as pass-through entities for income on mortgages from debtors through
the Agency pools to investors.
(3) Yields have been calculated on a full tax-equivalent basis.
-13-
<PAGE>
AVAILABLE-FOR-SALE SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1999 (1)
DUE AFTER
DUE IN ONE DUE AFTER
ONE YEAR FIVE YEARS
YEAR OR THROUGH THROUGH DUE AFTER
LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. treasury securities:
Balance.................................. $ 0 $ 0 $ 0 $ 0 $ 0
Weighted average yield................... 0% 0% 0% 0% 0%
U.S. government securities:
Balance.................................. $ 4,589 $ 19,438 $ 47,672 $ 0 $ 71,699
Weighted average yield................... 5.59% 5.97% 6.48% 0% 6.04%
Agency Pools (2):
Balance.................................. $ 470 $ 3,575 $ 571 $ 10,713 $ 15,329
Weighted average yield................... 8.16% 7.51% 24.57% 7.77% 8.27%
Municipal securities - nontaxable (3):
Balance.................................. $ 1,218 $ 3,060 $ 3,385 $ 13,252 $ 20,915
Weighted average yield................... 5.65% 6.05% 5.72% 5.47% 5.56%
Municipal securities - taxable:
Balance.................................. $ 0 $ 111 $ 508 $ 1,518 $ 2,137
Weighted average yield................... 0% 7.00% 6.00% 6.97% 6.78%
Commercial paper:
Balance.................................. $ 0 $ 0 $ 0 $ 0 $ 0
Weighted average yield................... 0% 0% 0% 0% 0%
Total:
Balance.................................. $ 6,278 $ 26,184 $ 52,136 $ 25,482 $ 110,080
Weighted average yield................... 5.80% 6.20% 6.62% 6.52% 6.28%
</TABLE>
- ------------------------------------
(1) Based on contractual maturities and, therefore, do not reflect principal
amortization.
(2) Government guaranteed mortgage pools, such as FHLMC, FNMA, and GNMA, which
act as pass-through entities for income on mortgages from debtors through
the Agency pools to investors.
(3) Yields have been calculated on a full tax-equivalent basis.
-14-
<PAGE>
The Company invests in tax-exempt securities to help control taxable
income. Interest paid on tax-exempt securities is non-taxable for ordinary
income tax purposes and partially taxable for alternative minimum tax purposes.
Management attempts to balance its investments in tax-exempt securities in order
to maximize the tax benefits from these investments. The Company modestly
increased the size of its tax exempt portfolio in 1998 and 1999 in order to
accomplish these goals.
TRUST DEPARTMENT ACTIVITIES
Although the Bank maintains a trust department for individuals and
corporate entities, it currently is engaging in a minimal level of trust
activities, consisting primarily of acting as an escrow agent.
SOURCE OF FUNDS
General. The Bank's primary source of funds has historically been customer
deposits. Scheduled loan repayments are a relatively stable source of funds,
while deposit inflows and unscheduled loan prepayments, which are influenced by
general interest rate levels, interest rates available on other investments,
competition, economic conditions and other factors, are not. Although the Bank's
deposit balances have shown historical growth, such balances may be influenced
by changes in the banking industry. Borrowings may be used on a short-term basis
to compensate for reductions in other sources of funds (such as deposit inflows
at less than projected levels). Borrowings may also be used on a longer term
basis to match the maturity or repricing intervals of assets. In 1994, the Bank
became a member of the Federal Home Loan Bank of Topeka (the "FHLB"). The Bank
purchased $373,900 of dividend-bearing stock in the FHLB. In 1998 and 1999 the
Bank increased its holdings of FHLB dividend-bearing stock to $988,000 and
$1,984,000, respectively. The FHLB provides the Bank with access to a
collateralized credit line of approximately $40.1 million, as well as a source
to sell excess federal funds.
On January 14, 1997, the Bank borrowed $10 million from the FHLB in the
form of two $5 million loans. The purpose of securing these loans was primarily
to provide liquidity and allow the Bank to limit its capital exposure relative
to the Available for Sale portfolio. The first $5,000,000 enabled management to
reduce its current daily purchase of Federal Funds from approximately $8,000,000
to $3,000,000. With the remaining $5,000,000, the Bank purchased approximately
$5,000,000 in short-term U.S. Government securities, which were placed in the
Available for Sale portfolio. This allowed the Bank to transfer approximately
$5,000,000 in long-term GMNA mortgage pool securities with relatively high
coupon yields to Held to Maturity, which limited the Bank's capital exposure.
The loans were structured as follows: $5,000,000 at 6.34%, maturing January 14,
1999; and $5,000,000 at 6.50%, maturing January 14, 2000. The Bank repaid these
loans on their maturity dates.
During 1999 the Bank borrowed up to $38.6 million from the FHLB with rates
ranging from 4.90% to 6.50% and maturities ranging from one day to three months.
The purpose for these loans was to use an alternative source of funding to fund
current loan growth at a time when the Bank's deposits had not increased and
liquidation of a portion of the Bank's bond portfolio was not believed to be
prudent. The Company expects that these loans will be repaid with liquidity from
normal increases in deposits coupled with liquidity from the Bank's bond
portfolio. During 1999, the Bank repaid $10.0 million of the FHLB loans.
Deposit Activities. The Bank offers a variety of accounts for depositors
designed to attract both short-term and long-term deposits. These accounts
include certificates of deposit ("CDs"), savings accounts,
-15-
<PAGE>
money market accounts, checking and negotiable order of withdrawal accounts and
individual retirement accounts. These accounts generally earn interest at rates
established by management based on competitive market factors and management's
desire to increase or decrease certain types or maturities of deposits. The Bank
has not sought brokered deposits and does not currently intend to do so in the
future. The Bank had no brokered deposits at December 31, 1999.
The following table presents the average balances outstanding for each
major category of deposits and weighted average interest rates paid for
interest-bearing deposits for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
--------------------- -------------------------- ----------------------
(DOLLARS IN THOUSANDS)
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ---------- -------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand deposits........... $ 104,361 2.63% $ 83,040 2.83% $ 72,494 2.89%
Certificates of deposit.................... 77,729 5.16% 50,982 5.63% 32,195 5.40%
Savings accounts........................... 18,999 2.17% 11,932 2.51% 10,903 2.61%
Noninterest-bearing demand deposits........ 80,508 N/A 59,648 N/A 49,438 N/A
---------- ---------- -------------- ----------- ---------- ----------
Total............................. $ 281,597 3.56% $ 205,602 3.57% $ 165,030 3.57%
========== ========== ============== =========== ========== ==========
</TABLE>
The following table shows the amount and maturity of CDs that had balances
of more than $100,000 at the dates indicated.
DECEMBER 31,
1999 1998
---------- -----------
(DOLLARS IN THOUSANDS)
CDs over $100,000 with remaining maturity
Less than three months..................... $ 23,219 $ 27,211
Three to six months........................ 4,833 3,872
Over six months to one year................ 10,760 2,616
Over one year.............................. 3,164 10,532
---------- -----------
Total............................. $ 41,976 $ 44,231
========== ===========
COMPETITION
The banking business in the greater Denver metropolitan area is highly
competitive. The Company competes for loans and deposits with other commercial
banks, credit unions, thrifts, mortgage bankers and other institutions with
respect to the scope and type of services offered, interest rates paid on
deposits and pricing of loans, among other things. Many of these competitors
have substantially greater resources than the Company. In addition, by virtue of
their larger capital bases or affiliation with larger multi-bank holding
companies, some of the banks with which the Bank competes have substantially
larger lending limits than the Bank, and perform other functions for their
customers which the Bank can offer only through correspondents. The Company also
faces significant competition for investors' funds from sellers of short-term
money market securities and other corporate and government securities.
-16-
<PAGE>
The Company competes for loans principally through the range and quality
of the services it provides, interest rates and loan fees. The Company believes
its personal service philosophy in conjunction with its staff of experienced
loan officers enables it to compete favorably with other financial institutions
in its focus market of small and medium-sized businesses. The Company actively
solicits deposit-related clients and competes for deposits by offering customers
personal attention and professional service.
Competition has intensified as a result of changes in Colorado banking
laws that permit (i) unlimited branching (only limited statewide branching of
Colorado-domiciled financial institutions was permitted until January 1, 1997),
and (ii) out-of-state holding companies to acquire Colorado-based financial
institutions, provided that the laws of the state in which the out-of-state
institutions conduct their principal operations similarly permit Colorado-based
institutions to acquire financial institutions domiciled in their states. During
the past several years, substantial consolidation among financial institutions
in Colorado has occurred. Management believes that this consolidation led to
substantial account disruption for small and medium-sized businesses which are
below the focus threshold for larger banks and which have had their lending
relationships at such banks severed. Management further believes that this may
lead customers in the Company's market area to seek a relationship with smaller,
service-oriented institutions such as the Bank.
EMPLOYEES
At December 31, 1999, the Company had approximately 135 full-time
equivalent employees. In order to effectuate its "staff to management"
philosophy, the Company has placed a high priority on staff development. This
development involves extensive training (including customer service training)
and selective hiring. New hires are selected on the basis of both technical
skills and customer service capabilities. Emphasis is placed upon hiring and
retaining additional key officers in areas such as lending, administration and
finance. None of the Company's employees are covered by a collective bargaining
agreement with the Company and management believes that its relationship with
its employees as a group is good.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. The information contained in this section summarizes
portions of the applicable laws and regulations relating to the supervision and
regulation of the Company and its subsidiaries. These summaries do not purport
to be complete, and they are qualified in their entirety by reference to the
particular statutes and regulations described. Any change in applicable law or
regulation may have a material effect on the business and prospects of the
Company and its subsidiaries.
BANK HOLDING COMPANY REGULATION
The Company is a bank holding company within the meaning of the Bank
Holding Company Act and is registered as such with the Federal Reserve Board.
Under the current terms of that Act, activities of the Company, and those of
companies which it controls or in which it holds more than 5% of the voting
stock, are limited to banking or managing or controlling banks or furnishing
services to or performing services for its subsidiaries, or any other activity
which the Federal Reserve Board determines to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
such determinations, the Federal Reserve Board is required to consider whether
the performance of such activities by a bank holding company or
-17-
<PAGE>
its subsidiaries can reasonably be expected to produce benefits to the public
such as greater convenience, increased competition or gains in efficiency that
outweigh the possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices.
Bank holding companies, such as the Company, are required to file with the
Federal Reserve Board certain reports and information and are required to obtain
prior approval of the Board to engage in a new activity or to acquire more than
5% of any class of voting stock of any company. Pursuant to the Riegle-Neal
Interstate Branching and Efficiency Act of 1994 ("Riegle-Neal Act"), subject to
approval by the Federal Reserve Board, bank holding companies are authorized to
acquire either control of, or substantial assets of, a bank located outside the
bank holding company's home state. These acquisitions are subject to limitations
which are mentioned in the discussion on "Interstate Banking" which follows. The
Riegle-Neal Act reaffirms the right of states to segregate and tax separately
incorporated subsidiaries of a bank or bank holding company. The Riegle-Neal Act
also affects interstate branching and mergers.
The Federal Reserve Board has authorized the acquisition and control by
bank holding companies of savings and loan associations and certain other
savings institutions without regard to geographic restrictions applicable to
acquisition of shares of a bank.
The Federal Reserve Board is authorized to adopt regulations affecting
various aspects of bank holding companies. Pursuant to the general supervisory
authority of the Bank Holding Company Act and directives set forth in the
International Lending Supervision Act of 1983, the Federal Reserve Board has
adopted capital adequacy guidelines prescribing both risk-based capital and
leverage ratios.
The enactment of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act")
repeals sections 20 and 32 of the Banking Act of 1933, allowing new
opportunities to be available for banks, other depository institutions,
insurance companies and securities firms to enter into combinations that permit
a single financial services organization to offer customers a more complete
array of financial products and services. To further this goal, the GLB Act
amends section 4 of the Act providing a new regulatory framework for regulation
through the financial holding company ("FHC"), which will have as its umbrella
regulator the Federal Reserve Board. Functional regulation of the FHC's
separately regulated subsidiaries will be conducted by their primary functional
regulator. Pursuant to the GLB Act, bank holding companies, subsidiary
depository institutions thereof and foreign banks electing to qualify as a FHC
must be "well managed," "well capitalized" and at least rated satisfactory under
the Community Reinvestment Act in order for them to engage in new financial
activities. The GLB Act provides a federal right to privacy of non-public
personal information of individual customers. Union Bankshares and its
Affiliates are also subject to certain state laws that deal with the use and
distribution of non-public personal information.
REGULATORY CAPITAL REQUIREMENTS
Risk-Based Capital Guidelines. The Federal Reserve Board established
risk-based capital guidelines for bank holding companies effective March 15,
1989. The guidelines define Tier I Capital and Total Capital. Tier I Capital
consists of common and qualifying preferred shareholders' equity and minority
interests in equity accounts of consolidated subsidiaries, less goodwill and 50%
(and in some cases up to 100%) of investment in unconsolidated subsidiaries.
Total Capital consists of Tier I Capital plus qualifying mandatory convertible
debt, perpetual debt, certain hybrid capital instruments, certain preferred
stock not qualifying as Tier I Capital, subordinated and other qualifying term
debt up to specified limits, and a portion of the allowance for credit losses,
less investments in unconsolidated subsidiaries and in other designated
subsidiaries or other associated companies
-18-
<PAGE>
at the discretion of the Federal Reserve Board, certain intangible assets, a
portion of limited-life capital instruments approaching maturity and reciprocal
holdings of banking organizations' capital instruments. The Tier I component
must constitute at least 50% of qualifying Total Capital.
Risk-based capital ratios are calculated with reference to risk-weighted
assets, which include both on-balance sheet and off-balance sheet exposures. The
risk-based capital framework contains four risk-weighted categories for bank
holding company assets -- 0%, 20%, 50%, and 100%. Zero percent risk-weighted
assets include, generally, cash and balances due from Federal Reserve Banks, and
obligations unconditionally guaranteed by the U.S. government or its agencies.
Twenty percent risk-weighted assets include, generally, claims on U.S. Banks and
obligations guaranteed by U.S. government sponsored agencies as well as general
obligations of states or other political subdivisions of the United States.
Fifty percent risk-weighted assets include, generally, loans fully secured by
first liens on one-to-four family residential properties, subject to certain
conditions. All assets not included in the foregoing categories are assigned to
the 100% risk-weighted category, including loans to commercial and other
borrowers. As of year-end 1992, the minimum required ratio for qualifying Total
Capital became 8%, of which at least 4% must consist of Tier I Capital. At
December 31, 1999, the Company's Tier I and Total Capital ratios were 10.00% and
12.68%, respectively.
The current risk-based capital ratio analysis establishes minimum
supervisory guidelines and standards. It does not evaluate all factors affecting
an organization's financial condition. Factors which are not evaluated include
(i) overall interest rate exposure; (ii) quality and level of earnings; (iii)
investment or loan portfolio concentrations; (iv) quality of loans and
investments; (v) the effectiveness of loan and investment policies; (vi) certain
risks arising from nontraditional activities; and (vii) management's overall
ability to monitor and control other financial and operating risks, including
the risks presented by concentrations of credit and nontraditional activities.
The capital adequacy assessment of federal bank regulators will, however,
continue to include analyses of the foregoing considerations and in particular,
the level and severity of problem and classified assets. Market risk of a
banking organization -- risk of loss stemming from movements in market prices --
is not evaluated under the current risk-based capital ratio analysis (and is
therefore analyzed by the bank regulators through a general assessment of an
organization's capital adequacy) unless trading activities constitute 10 percent
or $1 billion or more of the assets of such organization. Such an organization
(unless exempted by the banking regulators) and certain other banking
organizations designated by the banking regulators must, beginning on or before
January 1, 1998, include in its risk-based capital ratio analysis charges for,
and hold capital against, general market risk of all positions held in its
trading account and of foreign exchange and commodity positions wherever
located, as well as against specific risk of debt and equity positions located
in its trading account. Currently, the Company and the Bank do not calculate a
risk-based capital charge for their market risk.
Minimum Leverage Ratio. The Federal Reserve Board has adopted capital
standards and leverage capital guidelines that include a minimum leverage ratio
of 3% Tier I Capital to total assets (the "leverage ratio"). The leverage ratio
is used in tandem with a risk-based ratio of 8% that took effect at the end of
1992.
The Federal Reserve Board has emphasized that the leverage ratio
constitutes a minimum requirement for well-run banking organizations having
well-diversified risk, including no undue interest rate exposure, excellent
asset quality, high liquidity, good earnings, and a composite rating of 1 under
the Interagency Bank Rating System. Banking organizations experiencing or
anticipating significant growth, as well as those organizations which do not
exhibit the characteristics of a strong, well-run banking organization described
above, will be required to maintain strong capital positions substantially above
the minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the Federal Reserve Board has indicated that it will
consider a "tangible Tier I Capital Leverage Ratio" (deducting all intangibles)
and other indices of capital
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<PAGE>
strength in evaluating proposals for expansion or new activities. At December
31, 1999, the Company's Tangible Tier I Capital Leverage Ratio was 6.37%.
Other Issues And Developments Relating To Regulatory Capital. Pursuant to
such authority and directives set forth in the International Lending Supervision
Act of 1983, the Comptroller of the Currency, the FDIC, and the Federal Reserve
Board have issued regulations establishing the capital requirements for banks
under federal law. The regulations, which apply to the Bank, establish minimum
risk-based and leverage ratios which are substantially similar to those
applicable to the Company. As of December 31, 1999, the risk-based and leverage
ratio of the Bank exceeded the minimum requirements.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires the federal banking regulators to take "prompt corrective
action" in respect of banks that do not meet minimum capital requirements and
imposes certain restrictions upon banks which meet minimum capital requirements
but are not "well capitalized" for purposes of FDICIA. FDICIA established five
capital tiers: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
Implementing regulations adopted by the federal banking agencies define the
corrective action by the federal banking agencies. A bank may be placed in a
capitalization category that is lower than is indicated by its capital position
if it receives an unsatisfactory examination rating with respect to certain
matters. Failure to meet capital guidelines could subject a bank to a variety of
restrictions and enforcement remedies. All insured banks are generally
prohibited from making any capital distributions and from paying management fees
to persons having control of the bank where such payments would cause the bank
to be undercapitalized. Holding companies of significantly undercapitalized,
critically undercapitalized and certain undercapitalized banks may be required
to obtain the approval of the Federal Reserve Board before paying capital
distributions to their shareholders. Moreover, a bank that is not well
capitalized is generally subject to various restrictions on "pass through"
insurance coverage for certain of its accounts and is generally prohibited from
accepting brokered deposits and offering interest rates on any deposits
significantly higher than the prevailing rate in its normal market area or
nationally (depending upon where the deposits are solicited). Such banks and
their holding companies are also required to obtain regulatory approval prior to
their retention of senior executive officers.
Banks which are classified undercapitalized, significantly
undercapitalized or critically undercapitalized are required to submit capital
restoration plans satisfactory to their federal banking regulator and guaranteed
within stated limits by companies having control of such banks (i.e., to the
extent of the lesser of five percent of the institution's total assets at the
time it became undercapitalized or the amount necessary to bring the institution
into compliance with all applicable capital standards as of the time the
institution fails to comply with its capital restoration plan, until the
institution is adequately capitalized on average during each of four consecutive
calendar quarters), and are subject to regulatory monitoring and various
restrictions on their operations and activities, including those upon asset
growth, acquisitions, branching and entry into new lines of business and may be
required to divest themselves of or liquidate subsidiaries under certain
circumstances. Holding companies of such institutions may be required to divest
themselves of such institutions or divest themselves of or liquidate
nondepository affiliates under certain circumstances. Critically
undercapitalized institutions are also prohibited from making payments of
principal and interest on debt subordinated to the claims of general creditors
as well as to the mandatory appointment of a conservator or receiver within 90
days of becoming critically undercapitalized unless periodic determinations are
made by the appropriate federal banking agency, with the concurrence of the
FDIC, that forbearance from such action would better protect the affected
deposit insurance fund. Unless appropriate findings and certifications are made
by the appropriate federal banking agency with the concurrence of the FDIC, a
critically undercapitalized institution must be placed in receivership if it
remains critically undercapitalized on average during the calendar quarter
beginning 270 days after the date it became critically undercapitalized.
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Other Regulatory and Supervisory Issues. Pursuant to FDICIA, the federal
banking agencies have adopted regulations or guidelines prescribing standards
for safety and soundness of insured banks and in some instances their holding
companies, including standards relating to internal controls, information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation, fees and benefits, asset
quality, earnings and stock valuation, as well as other operational and
managerial standards deemed appropriate by the agencies. Upon a determination by
a federal banking agency that an insured bank has failed to satisfy any such
standard, the bank will be required to file an acceptable plan to correct the
deficiency. If the bank fails to submit or implement an acceptable plan, the
federal banking agency may, and in some instances must, issue an order requiring
the institution to correct the deficiency, restrict its asset growth or increase
its ratio of tangible equity to assets, or imposing other operating
restrictions.
FDICIA also contains provisions which, among other things, restrict
investments and activities as principal by state nonmember banks to those
eligible for national banks, impose limitations on deposit account balance
determinations for the purpose of the calculation of interest, and require the
federal banking regulators to prescribe, implement or modify standards for
extensions of credit secured by liens on interests in real estate or made for
the purpose of financing construction of a building or other improvements to
real estate, loans to bank insiders, regulatory accounting and reports, internal
control reports, independent audits, exposure on interbank liabilities,
contractual arrangements under which institutions receive goods, products or
services, deposit account-related disclosures and advertising as well as to
impose restrictions on federal reserve discount window advances for certain
institutions and to require that insured depository institutions generally be
examined on-site by federal or state personnel at least once every 12 months.
In connection with an institutional failure or FDIC rescue of a financial
institution, the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") grants to the FDIC the right, in many situations, to charge its
actual or anticipated losses against commonly controlled depository institution
affiliates of the failed or rescued institution (although not against a bank
holding company itself).
The Community Reinvestment Act ("CRA") requires banks to help serve the
credit needs in their communities, including credit to low and moderate income
individuals and geographies. Should the Company or its subsidiaries fail to
adequately serve the community, there are penalties which might be imposed.
Corporate applications to expand branches, relocate, add subsidiaries and
affiliates, and merge with or purchase other financial institutions could be
denied. Community groups are encouraged through the regulation to protest
applications for any bank subject to this regulation if they feel that the bank
is not serving the credit needs of the community in which it serves. The Company
and its subsidiaries have been deemed by regulators in the past to be adequately
serving its communities.
The nature of the banking and financial services industry, as well as
banking regulation, may be further affected by various legislative and
regulatory measures currently under consideration. The most important of such
measures include legislation designed to permit increased affiliations between
commercial and financial firms (including securities firms) and
federally-insured banks, reduce regulatory burdens on financial institutions,
and eliminate or revise the features of the specialized savings association
charter. It is impossible to predict whether or in what form these proposals may
be adopted in the future and, if adopted, what the effect of their adoption will
be on the Company and the Bank.
There are many other regulations requiring detailed compliance procedures
which increase costs and require additional time commitments of employees.
Regulators and the Congress continue to put in place rules and laws to protect
consumers, which have a cumulative additional impact on the cost of doing
business. At this point, management cannot completely assess how earnings might
be affected by these consumer laws.
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DEPOSIT INSURANCE ASSESSMENTS
The insured Bank is required to make quarterly deposit insurance
assessment payments to the Bank Insurance Fund ("BIF"), and most savings
associations to the Savings Associations Insurance Fund ("SAIF"), under a
risk-based assessment system established by the FDIC. (In addition, certain
banks must also pay deposit insurance assessments to the SAIF and certain
savings associations, to the BIF alone or to both funds; the Bank is responsible
for deposit insurance assessments to the BIF alone.) Under this system, each
institution's insurance assessment rate is determined by the risk assessment
classification into which it has been placed by the FDIC. The FDIC places each
insured institution in one of nine risk assessment classifications based upon
its level of capital and supervisory evaluations by its regulators: "well
capitalized," "adequately capitalized" or "less than adequately capitalized"
institutions, with each category of institution divided into subcategories of
institutions which are either "healthy," of "supervisory concern" or of
"substantial supervisory concern." Those institutions deemed weakest by the FDIC
are subject to the highest assessment rates; those deemed strongest are subject
to the lowest assessment rates. The FDIC establishes semi-annual assessment
rates with the objective of enabling the affected insurance fund to achieve or
maintain a statutorily-mandated target reserve ratio of 1.25% of insured
deposits. In establishing assessment rates, the FDIC Board of Directors is
required to consider (i) expected operating expenses, case resolution
expenditures and income of the FDIC; (ii) the effect of assessments upon
members' earnings and capital; and (iii) any other factors deemed appropriate by
it.
Both BIF- and SAIF- assessable deposits are subject to an assessment
schedule providing for an assessment range of 0% to .27% (with intermediate
rates of .03%, .10%, .17%, and .24%, depending upon an institution's supervisory
risk group). Both BIF and SAIF assessment rates are subject to semi-annual
adjustment by the FDIC Board of Directors within a range of up to five basis
points without public comment. The FDIC Board of Directors also possesses
authority to impose special assessments from time to time.
In addition to the payment of deposit insurance assessments, depository
institutions are required to make quarterly assessment payments to the FDIC on
both their BIF and SAIF assessable deposits which will be paid to the Financing
Corporation created pursuant to FIRREA to enable it to pay interest and certain
other expenses on bonds which it issued pursuant to FIRREA to facilitate the
resolution of failed savings associations. Pursuant to the Federal Home Loan
Bank Act, the Financing Corporation, with the approval of the FDIC Board of
Directors, establishes assessment rates based upon estimates of (i) expected
operating expenses, case resolution expenditures and income of the Financing
Corporation; (ii) the effect of assessments upon members' earnings and capital;
and (iii) any other factors deemed appropriate by it. Additionally, the
Financing Corporation is required to assess BIF-assessable deposits at a rate
one-fifth the rate applicable to SAIF-assessable deposits until the first to
occur of the merger of the BIF and SAIF funds or January 1, 2000. Assessment
rates for the first semi-annual period of 1997 have been set at 1.30 basis
points annually for BIF-assessable deposits and 6.48 basis points annually for
SAIF-assessable deposits.
INTERSTATE BANKING
Existing laws and various regulatory developments have allowed financial
institutions to conduct significant activities on an interstate basis for a
number of years. During recent years, a number of financial institutions have
expanded their out-of-state activities and various states and the Congress have
enacted legislation intended to allow certain interstate banking combinations.
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The Riegle-Neal Act dramatically affects interstate banking activities. As
discussed previously, the Riegle-Neal Act allows the Federal Reserve Board to
approve the acquisition by a bank holding company of control or substantial
assets of a bank located outside the bank holding company's home state. An
insured bank may apply to the appropriate federal agency for permission to merge
with an out-of-state bank and convert its offices into branches of the resulting
bank. States retain the option to prohibit out-of-state mergers if they enacted
a statute specifically barring such mergers before June 1, 1997, and such law
applies equally to all out-of-state banks.
Interstate mergers authorized by the Riegle-Neal Act are subject to
conditions and requirements, the most significant of which include adequate
capitalization and management of the acquiring bank or bank holding company,
existence of the acquired bank for up to five years before purchase where
required under state law, existence of state laws that condition acquisitions on
institutions making assets available to a "state-sponsored housing entity," and
limitations on control by the acquiring bank holding company of not more than
10% of the total amount of deposits in insured depository institutions in the
United States or not more than 30% of the deposits in insured depository
institutions within that state. States may impose lower deposit concentration
limits, so long as those limits apply to all bank holding companies equally.
Additional requirements placed on mergers include conformity with state law
branching requirements and compliance with "host state" merger filing
requirements to the extent that those requirements do not discriminate against
out-of-state banks or out-of-state bank holding companies.
The Riegle-Neal Act also permits banks to establish and operate a "de novo
branch" in any state that expressly permits all out-of-state banks to establish
de novo branches in such state, if the law applies equally to all banks. (A "de
novo branch" is a branch office of a national bank or state bank that is
originally established as a branch and does not become a branch as a result of
an acquisition, conversion, merger, or consolidation.) Utilization of this
authority is conditioned upon satisfaction of most of the conditions applicable
to interstate mergers under the Riegle-Neal Act, including adequate
capitalization and management of the branching institution, satisfaction with
certain filing and notice requirements imposed under state law and receipt of
federal regulatory approvals. The State of Colorado did not exercise the option
to opt out of the federal legislation. Accordingly, the provisions of the
Riegle-Neal Act as summarized herein are applicable in the State of Colorado.
THE BANK
The Bank is a Colorado banking corporation, the deposits of which are
insured by the FDIC, and are subject to supervision and regulation by the
Federal Deposit Insurance Corporation and the Colorado Division of Banking. No
Colorado bank may engage in any activity not permitted for national banks,
unless the institution complies with applicable capital requirements and the
FDIC determines that the activity poses no significant risk to the insurance
fund. This limitation does not now affect the Bank, since it is not presently
involved in the types of transactions covered by this limitation.
Dividends paid by the Bank provide substantially all of the cash flow of
the Company. Under Colorado law and Federal Deposit Insurance Corporation
policies, the approval of the principal regulator is required prior to the
declaration of any dividend by a bank if the total of all dividends declared in
any calendar year exceed the total of its net profits of that year combined with
its retained net profits for the preceding two years. In addition, a bank cannot
pay a dividend if it will cause the bank to be "undercapitalized."
The Federal Deposit Insurance Corporation periodically examines and
evaluates state-chartered banks that are not members of the Federal Reserve
System. Based upon such an evaluation, the examining regulator
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may revalue the assets of an insured institution and require that it establish
specific reserves to compensate for the difference between the value determined
by the regulator and the book value of such assets. The Colorado Division of
Banking also conducts examinations of state-chartered banks. The Colorado
Division of Banking may accept the results of a federal examination in lieu of
conducting an independent examination. The Colorado Division of Banking also has
the authority to revalue the assets of a state-chartered institution and require
it to establish reserves.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of
the Board of Governors, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Board of Governors to affect the money supply are open market operations in U.S.
Government securities, changes in the discount rate on member bank borrowings,
imposing or changing reserve requirements against member bank deposits, and
imposing or changing reserve requirements against certain borrowings by banks
and their affiliates. These means are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and
their use may affect the interest rate charged on loans or paid on deposits.
The Board of Governors' monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on the business and earnings of the Company and its subsidiaries
cannot be predicted.
RISK FACTORS RELATING TO THE COMPANY
Economic Conditions and Impact of Interest Rates. The Company's
profitability, like that of most similar financial institutions, depends largely
on the Bank's net interest income, which is the difference between its interest
income on interest-earning assets, such as loans and investments, and its
interest expense on interest- bearing liabilities, such as deposits and
borrowings. Accordingly, the Company's results of operations and financial
condition are largely dependent on movements in market interest rates and its
ability to manage its assets in response to such movements. The difference
between the amount of the total interest-bearing assets and interest-bearing
liabilities which reprice within a given time period could have a negative
effect on the Bank's net interest income depending on whether such difference
was positive or negative and whether interest rates are rising or falling.
Increases in interest rates may reduce demand for loans and, thus, the
amount of loan and commitment fees earned by the Bank. In addition, fluctuations
in interest rates may also result in disintermediation, which is the flow of
funds away from depository institutions into direct investments which pay a
higher rate of return, and may affect the value of the Company's investment
securities and other interest earning assets. Because the Bank's assets consist
of a substantial number of loans with interest rates which change in accordance
with changes in prevailing market rates, if interest rates rise sharply, many of
the Bank's borrowers would be required to make higher interest payments on their
loans. Therefore, increases in interest rates may cause the Bank to experience
an increase in delinquent loans and defaults to the extent that borrowers are
unable to meet their increased debt servicing obligations. In addition, the Bank
has a substantial portfolio of fixed-rate loans that may be prepaid without
significant penalty, so that customers might prepay or refinance them in a
period of declining interest rates. That would alter the Bank's asset-liability
gap position and ultimately reduce the rates earned on those assets, as cash
flows from loan repayments would be re-invested at lower rates.
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Results of operations for financial institutions, including the Company,
may be materially and adversely affected by changes in prevailing economic
conditions, including declines in real estate values, rapid changes in interest
rates and the monetary and fiscal policies of the federal government. The
profitability of the Company depends in part on the spread between the interest
rates earned on assets and the interest rates paid on deposits and other
interest-bearing liabilities. Although management believes that the maturities
of the Company's assets are moderately balanced in relation to maturities of
liabilities ("asset/liability management"), asset/liability management involves
estimates as to how changes in the general level of interest rates will impact
the yields earned on assets and the rates paid on liabilities. A decrease in
interest rate spreads would have a negative effect on the net interest income
and profitability of the Company, and we cannot give any assurance that this
spread will not decrease. Although economic conditions in the Denver
metropolitan area have been generally strong, we cannot give any assurance that
such conditions will continue to prevail. Moreover, substantially all of the
loans of the Company are to businesses and individuals in the Denver area, and
any decline in the economy of this market area could have an adverse impact on
the Company. We cannot give any assurance that positive trends or developments
discussed in this Annual Report on Form 10-KSB will continue or that negative
trends or developments will not have a material adverse effect on the Company.
See "Item 6 - Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Growth and Acquisition Risks. The Company has pursued and intends to
continue to pursue an internal growth strategy, the success of which will depend
primarily on generating an increasing level of loans and deposits at acceptable
risk levels and terms without proportionate increases in noninterest expenses.
The Company has grown by the establishment of new branches, and intends to
consider new branching opportunities in the future. The Company cannot give any
assurance that it will be successful in continuing its internal growth strategy.
Although the Company does not have any discussions or negotiations underway
relating to any acquisitions in addition to the acquisition of Lakewood State
Bank, the Company in the future intends to review and solicit acquisition
opportunities and, at any given time, any attempt to acquire financial
institutions. The Company may not be successful in identifying acquisition
candidates, integrating acquired institutions or preventing loss of deposits at
acquired institutions. Competition for acquisitions in the Company's market area
is highly competitive, and the Company may not be able to acquire institutions
on terms beneficial to the Company. Furthermore, the level of success of the
Company's growth strategy will depend on maintaining sufficient regulatory
capital levels and on continued favorable economic conditions in the Denver
area.
Competitive Banking Environment. The banking business in Colorado is
highly competitive. The Company competes for loans and deposits with other
local, regional and national commercial banks, savings banks, savings and loan
associations, finance companies, money market funds, brokerage houses, credit
unions and nonfinancial institutions, any of which have substantially greater
financial resources than the Company. Interstate banking is permitted in
Colorado. As a result, management believes that the Company may experience
greater competition in its market area.
Allowance for Loan Losses. Inability of borrowers to repay loans can erode
earnings and capital of banks. Like all banks, the Company maintains an
allowance for loan losses to provide for loan defaults and nonperformance. The
allowance is based on prior experience with loan losses, as well as an
evaluation of the risks in the current portfolio, and is maintained at a level
considered adequate by management to absorb anticipated losses. The amount of
future losses is susceptible to changes in economic, operating and other
conditions, including changes in interest rates, that may be beyond management's
control, and such losses may exceed current estimates. At December 31, 1999 the
Company had nonperforming loans of $7,000 and an allowance for loan losses of
$2,892,000 or 1.6% of total loans and 41,314.28% of nonperforming loans. We
cannot give any assurance that the Company's allowance for loan losses will be
adequate to cover actual losses. Future provisions for loan losses could
materially and adversely affect results of operations of the Company. In
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addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. An increase
in the Bank's provision for loan losses would negatively affect the Company's
earnings. See "Item 6 - Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Lending Risks -- Credit Quality. A central focus of the Company's and the
Bank's strategy is the continued development and growth of a diversified loan
portfolio, with emphasis on commercial business lending to small- and
medium-sized businesses. Certain risks are inherent in the lending function,
including a borrower's inability to pay, insufficient collateral coverage and
changes in interest rates. Repayment risk on commercial loans is significantly
affected by changing economic conditions in a particular geographical area,
business or industry which could impair future operating performance. Risks
associated with general business loans include changes in general economic
conditions which may affect the borrower's ability to repay as well as
underlying collateral values. Installment and other consumer loans are also
subject to repayment risk.
Dependence on Key Personnel. The Company depends on the continued services
of Charles R. Harrison, Chairman of the Board and Chief Executive Officer of the
Company, Herman J. Zueck, the Bank's Chairman of the Board and Chief Executive
Officer and President of the Company and Bruce E. Hall, Vice President of the
Company. The Company has employment agreements with Messrs. Harrison, Zueck and
Hall. The loss of the services of Mr. Harrison, Mr. Zueck or Mr. Hall, or of
certain other key personnel, could adversely affect the Company. The Company is
the beneficiary of key-person life insurance on the lives of each of Messrs.
Harrison, Zueck and Hall. The Company's anticipated growth and expansion into
areas and activities requiring additional expertise are expected to place
increased demands on the Company's resources. These demands are expected to
require the addition of new management personnel and the development of
additional expertise by existing management personnel. The failure to acquire
such services or to develop such expertise could have a material adverse effect
on the Company's future growth.
Control by Officers and Directors as a Group; Anti-takeover Effect. The
Company's officers and directors own beneficially approximately 55.9% of the
outstanding shares of Common Stock. This percentage includes the shares of
Common Stock held in the Company's 401(k) plan over which certain officers of
the Company have voting control as trustees of the 401(k) plan. As a result,
they alone may elect by simple majority the Board of Directors. This may impede
the efforts of a third party to acquire control of the Company or to change the
Board of Directors of the Company.
Government Regulation and Recent Legislation. The Company and the Bank are
subject to extensive federal and state legislation, regulation and supervision
which is intended primarily to protect depositors and the Bank Insurance Fund,
rather than investors. Recently enacted, proposed and future legislation and
regulations designed to strengthen the banking industry have had and may have a
significant impact on the banking industry. Although some of the legislative and
regulatory changes may benefit the Company and the Bank, others may increase
their costs of doing business or otherwise adversely affect the Company and the
Bank and create competitive advantages for non-bank competitors.
The financial institutions industry is subject to significant regulation
which has materially affected the financial institutions industry in the past
and will do so in the future. Such regulations, which affect the Company on a
daily basis, may be changed at any time, and the interpretation of the relevant
law and regulations are also subject to change by the authorities who examine
the Company and the Bank and interpret those laws and regulations. We cannot
make any assurance that any present or future changes in the laws or regulations
or in their interpretation will not adversely and materially affect the Company.
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Economic Conditions and Monetary Policies. Conditions beyond the Company's
control may have a significant impact on the Company's operations and its net
interest income from one period to another. Examples of such conditions could
include:
o prevailing economic conditions both nationally and in the Denver
metropolitan market;
o the strength of credit demands by customers;
o fiscal and debt management policies of the federal government,
including changes in tax laws;
o the Federal Reserve's monetary policy, including the percentage of
deposits that may be held in the form of non-earning cash reserves;
o the introduction and growth of new investment instruments and
transaction accounts by non-bank financial competitors; and
o changes in rules and regulations governing the payment of interest on
deposit accounts.
Potential Liability for Undercapitalized Subsidiary Bank. Under a federal
law, a bank holding company may be required to guarantee a capital plan filed by
an undercapitalized bank or thrift subsidiary with its primary regulator. If the
subsidiary defaults under the plan, the holding company may be required to
contribute to the capital of the subsidiary bank an amount equal to the lesser
of 5% of the bank's assets at the time it became undercapitalized or the amount
necessary to bring the bank into compliance with applicable capital standards.
It is, therefore, possible that the Company would be required to contribute
capital to the Bank or any other bank it may acquire in the event that the Bank
or such other bank becomes undercapitalized.
ITEM 2. PROPERTIES
The Bank leases space in a six-story office building in Denver, Colorado,
with approximately 21,279 rentable square feet. This space houses the Bank's
loan and teller facilities, new accounts personnel, safe deposit facilities, the
trust department and administrative offices. The Bank also leases a 1,723
square-foot detached facility located one block from the Bank's main offices,
which is used for drive-up and walk-in customer services. In addition, the Bank
leases 2,220 square feet of space in an adjacent building which is used for
storage and an employees' lounge. The lease provides the Bank with parking
rights for use by the Bank's customers. The foregoing leases run for a term of
ten years from July 2, 1994, renewable at the Bank's option for two additional
terms of five years each. Effective June 1, 1996, the Bank leased 2,347
additional square feet in the six-story office building, renewable on an annual
basis. The space is occupied by the Bank's Real Estate/Construction Loan
Department. Effective July 1, 1997, this lease agreement was amended to be
concurrent with the same terms of the Bank's original lease agreement dated July
2, 1994. The Bank leases all of the above space at an average of approximately
$11.75 per square foot.
The Company expanded its operations in July, 1994 through the opening of a
full-service branch in the Lakeside area of metropolitan Denver. The branch
occupies a two-story office building with approximately 8,325 square feet. The
building houses the branch's operations, the Bank's customer service operations
and the Bank's data processing operations. The original lease expires on July
31, 2004 and is renewable for two additional terms of five years each. Due to
the consolidation of customer service operations, on August 15, 1996, the Bank
leased 1,474 additional square feet on the second floor. The addendum to the
original lease expires August 14, 2001
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and is renewable at the Bank's option for three additional years. As a result of
growth of data processing, effective December 1, 1997, the Bank leased an
additional 1,320 square feet on the second floor in order to expand the Bank's
data processing department. The Bank leases this space at approximately $13.82
per square foot, renewable on an annual basis. The Bank leases this building at
approximately $13.56 per square foot, with rental subject to annual per square
foot escalation.
The Company again expanded its operations in March, 1995 by leasing a
3,917 square-foot building to house a branch in the University Hills area of
metropolitan Denver. The lease expires on March 31, 2005 and is renewable at the
Bank's option for two additional terms of five years. The Bank leases this
building at approximately $12.94 per square foot.
On December 4, 1995, the Company opened its third branch, this one in the
Lakewood area of metropolitan Denver. The Bank leased space in a three-story
building with approximately 3,955 rentable square feet, along with a separate
drive-up facility with two stalls and a control booth. The lease runs through
October 31, 2005, renewable at the Bank's option for two additional terms of
five years each. The Bank leases the building space and drive-up facility at
approximately $18.75 per square foot.
In connection with the establishment of a fourth branch, which opened May
11, 1998, the Company is leasing a single-story building with 5,157 square feet
in the Littleton area of metropolitan Denver. The branch occupies approximately
3,449 square feet; the Bank subleases the remaining 1,708 square feet in the
building, at approximately $9.00 per square foot with rental subject to annual
per square foot escalation. The lease expires December 31, 2001 and is renewable
for 2 additional years. The lease runs for a term of ten years from February 4,
1998, renewable for two additional terms of five years. The Bank leases this
building at approximately $9.00 per square foot, with rental subject to
bi-annual per square foot escalation.
On October 19, 1998, the Company opened its fifth branch in the Golden
area of metropolitan Denver. The Bank leased space in a multi-tenant single
story building with approximately 1,705 square feet. The lease runs through July
31, 2001, renewable at the Bank's option for two additional terms of 8 years
each. The Bank leases the building space at approximately $18.75 per square
foot.
On December 17, 1998, the Company acquired Lakewood State Bank, located in
the Lakewood area of metropolitan Denver. The site, which was owned by Lakewood
State Bank and is now owned by the Company, contains a three-story building
constructed in 1972 with a total net rentable area of approximately 20,079
square feet and includes eight drive-through lanes at the rear of the building.
The building and drive-throughs are situated on a parcel containing a total of
approximately 1.425 acres of land. The Bank occupies approximately 15,000 square
feet and subleases approximately 90% of the remaining space to eight (8) small
tenants. Parking is provided by an asphalt paved parking lot which contains 89
spaces.
The Company believes its existing facilities will be adequate to meet the
Company's needs for the foreseeable future. Should the Company need additional
space, management believes it will be able to secure facilities at reasonable
rates. The Company believes that the facilities are adequately covered by
insurance.
ITEM 3. LEGAL PROCEEDINGS
Periodically and in the ordinary course of business, various claims and
lawsuits are brought against the Company, such as claims to enforce liens,
condemnation proceedings on properties in which the Company holds security
interests, claims involving the making and servicing of real property loans and
other issues incident to
-28-
<PAGE>
the Company's business. In the opinion of the Company's management, the ultimate
liability, if any, resulting from such claims or lawsuits will not have a
material adverse effect on the financial position or results of operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1999.
-29-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Price Range of Common Stock
1999 1998
--------------------- ---------------------
High Low High Low
--------- --------- -------- ---------
First Quarter $ 12.00 $ 10.50 $ 14.38 $ 11.75
Second Quarter $ 15.00 $ 10.50 $ 16.00 $ 14.19
Third Quarter $ 18.85 $ 12.75 $ 15.63 $ 10.50
Fourth Quarter $ 17.68 $ 13.13 $ 14.00 $ 10.50
2000
-----------------------
High Low
--------- --------
First Quarter (to March 27, 2000) $13.50 $9.00
Union Bankshares' Common Stock has been traded on the NASDAQ National
Market System ("NASDAQ-NMS") stock market since March 1993 under the symbol
"UBSC". The above prices represent closing sale prices on the NASDAQ-NMS. As of
March 27, 2000, there were 98 shareholders of record and approximately 440
beneficial shareholders.
On November 23, 1997, the NASDAQ-NMS and the Securities and Exchange
Commission approved changes to the listing and maintenance standards required to
be met for companies listed on the NASDAQ-NMS. In order to come into compliance
with the revised maintenance requirements, on May 27, 1998, the Company
completed a two-for-one split of its common stock in the form of a
share-for-share stock dividend.
DIVIDEND POLICY
The Company's policy is to retain its earnings to support the growth of
its business. The Board of Directors of the Company has not historically
declared cash dividends on its Common Stock, and does not plan to do so in the
foreseeable future. The ability of the Company to pay cash dividends largely
depends on the amount of cash dividends paid to it by the Bank. Capital
distributions, including dividends, by institutions such as the Bank are subject
to restrictions tied to the institution's earnings.
-30-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As previously announced, on March 17, 2000, the Company and Gold Banc
mutually agreed to terminate their agreement dated August 9, 1999, providing for
the acquisition of Union Bankshares, Ltd. by Gold Banc. The agreement provided
for the acquisition of all the Common Stock of the Company for a purchase price
of $23.05 per share, to be paid in shares of Gold Banc common stock and the
assumption of all outstanding options. The exchange ratio was to be determined
by dividing $23.05 by the average price of Gold Banc common stock during the
10-day trading period ending three days prior to closing, unless the average
price is less than $13 or greater than $16, in which case the average price
would have been fixed at $13 or $16, respectively. On August 9, 1999, the
closing price on the NASDAQ Stock Market for Gold Banc Common Stock was $11.50.
At the close of trading on March 16, 2000, the Gold Banc share price was $6 1/8.
As such, the value of the transaction to the Company's stockholders was
substantially diminished.
The Company's Consolidated Financial Statements show its financial
condition and information on a consolidated basis. The Bank is the only
operating unit of the Company. The differences between the Company's financial
condition and results of operations and those of the Bank have historically
consisted primarily of the $10 million loan obtained by the Company upon the
acquisition of the Bank (the "Acquisition Loan"), the $6.9 million in 8.3%
convertible notes due 2003 (the "Convertible Notes") issued as part of the
Company's initial public offering in 1993 and principal and interest payments
thereon, the $4.0 million loan obtained in March 1996 in connection with the
redemption of the remaining Convertible Notes outstanding, and the amortization
of the values assigned to the Bank's core deposits and goodwill in the
acquisition of the Bank. In 1993, the Company began amortizing the remaining
goodwill relating to the acquisition at the rate of approximately $226,000 per
year through 2009.
On December 17, 1998, Union Bankshares Capital Trust I, a newly-formed
Delaware business trust, issued approximately $10.3 million of its 9% Cumulative
Trust Preferred Securities guaranteed on a subordinated basis by the Company.
The Company contributed approximately $7 million of the proceeds of the public
offering to the Bank to finance the acquisition of Lakewood State Bank. The
remainder of the net proceeds was used for general corporate purposes including
the payoff of all outstanding amounts of the $4.0 million loan obtained in March
1996. Currently, the differences between the Company's financial condition and
results of operations and those of the Bank consist of the interest expense
relating to the 9% Cumulative Trust Preferred Securities, and the amortization
of the remaining goodwill relating to the acquisition of the Bank.
The Company has opened five branches since July 1994 and acquired Lakewood
State Bank in December 1998. As expected, the branches have all experienced
greater expenses than income during the early stages of operations. As the
deposit and loan balances have grown, however, the monthly net losses have
become smaller. During the last quarter of 1997 and all of 1998 and 1999, each
of the first three branches opened had an excess of income over direct costs.
Management expects the Littleton and Golden branches opened in 1998 to follow a
similar pattern.
NET INTEREST INCOME
For most financial institutions, the primary component of earnings is net
interest income. Net interest income is the difference between interest income,
principally from loan and investment securities portfolios, and interest
expense, principally on customer deposits and borrowings. Changes in net
interest income result from
-31-
<PAGE>
changes in volume, spread and margin. Volume refers to the average dollar level
of interest-earning assets and interest-bearing liabilities. Spread refers to
the difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities. Margin refers to net interest
income divided by average interest-earning assets and is influenced by the level
and relative mix of interest-earning assets and interest-bearing liabilities.
During the fiscal years ended December 31, 1999, 1998 and 1997, average
interest-earning assets were $307.6 million, $218.4 million, and $181.5 million,
respectively. During these same periods, net interest margin, computed on a full
tax equivalent basis, was 4.99%, 5.60% and 6.25%, respectively. The decline from
fiscal year 1997 to fiscal year 1999 is primarily the result of increased
competition for both loans and deposits and the percentage of interest-earning
assets held in the securities portfolio. Net interest margin is expected to
improve in the year ending December 31, 2000. See "Results of Operations."
The following tables set forth for the periods indicated information with
regard to average balances of assets and liabilities, as well as the total
dollar amounts of interest income from interest-earning assets and interest
expense on interest-bearing liabilities, resultant yields or costs, net interest
income, net interest spread, net interest margin and the ratio of average
interest-earning assets to average interest-bearing liabilities. Net interest
income is computed on a full tax equivalent basis to reflect the effect of tax
exempt income earned on municipal obligations in the investment securities
portfolio. Full tax equivalent interest income on tax exempt securities is the
amount of income that would have to be earned on taxable securities to yield the
same after tax return. A 34% tax rate was used.
-32-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- -------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED OR YIELD OR AVERAGE EARNED OR YIELD OR AVERAGE EARNED OR YIELD OR
BALANCE (1) PAID COST BALANCE (1) PAID COST BALANCE (1) PAID COST
---------- --------- -------- ---------- ---------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:
Commercial Loans.......... $ 115,507 $ 10,923 9.46% $ 90,585 $ 8,878 9.80% $ 79,626 $ 8,041 10.10%
Real estate mortgage...... 3,753 354 9.43% 5,446 508 9.33% 4,892 465 9.51%
Real estate construction.. 17,482 1,993 1.40% 11,559 1,371 11.86% 8,251 1,050 12.73%
Consumer loans............ 22,942 2,078 9.06% 19,672 1,828 9.29% 20,274 1,892 9.33%
---------- --------- ----- -------- --------- ------ -------- -------- ------
Total loans.............. 159,684 15,348 9.61% 127,262 12,585 9.89% 113,043 11,448 10.13%
Allowance for loan loss..... (2,727) (2,250) (1,934)
Securities:
U.S. Government........... 115,828 7,223 6.24% 52,160 3,121 5.98% 41,479 2,887 6.96%
Municipal -- nontaxable... 22,491 1,720 7.65% 21,418 1,879 8.77% 17,250 1,479 8.58%
Municipal -- taxable...... 1,947 130 6.68% 2,547 173 6.79% 5,561 416 7.48%
---------- --------- ---- -------- --------- ------ -------- -------- ------
Total securities......... 140,266 9,073 6.48% 76,125 5,173 6.80% 64,290 4,782 7.44%
Interest-bearing deposits
in other banks........... -- -- 0.00% -- -- 0.00% -- -- 0.00%
Federal funds sold.......... 7,695 378 4.92% 15,012 796 5.30% 4,134 226 5.47%
---------- --------- ---- -------- --------- ------ -------- -------- ------
Total interest-earning
assets................. 307,645 24,799 8.06% 218,399 18,554 8.50% 181,467 16,456 9.07%
--------- --------- --------
Noninterest-earning assets:
Excess of investment in
subsidiary over net
assets acquired......... 6,838 2,770 2,841
Other assets.............. 26,675 19,921 15,138
---------- -------- --------
Total noninterest-
earning assets......... 33,513 22,691 17,979
---------- -------- --------
Total assets............. $ 338,431 $ 238,840 $197,512
========== ========== ========
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- ---------------------------------- -------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE (1) EARNED OR YIELD OR BALANCE (1) EARNED OR YIELD OR BALANCE (1) EARNED OR YIELD OR
PAID COST PAID COST PAID COST
---------- --------- -------- ---------- ---------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities:
Interest-bearing demand
accounts................. $ 104,361 $ 2,744 2.63% $ 83,040 $ 2,350 2.83% $ 72,494 $ 2,096 2.89%
Certificates of deposit.... 77,729 4,008 5.16% 50,982 2,869 5.63% 32,195 1,740 5.40%
Savings accounts........... 18,999 413 2.17% 11,932 300 2.51% 10,903 285 2.61%
--------- --------- ------- ----------- --------- ------ --------- -------- -------
Total interest-bearing
accounts................ 201,089 7,165 3.56% 145,954 5,519 3.78% 115,592 4,121 3.57%
Notes payable.............. 31,346 2,120 6.76% 11,469 799 6.97% 12,825 887 6.92%
Federal funds purchased.... 3,127 166 5.31% 32 2 6.25% 1,943 110 5.66%
--------- --------- ------- ---------- --------- ------ --------- -------- -------
Total interest-bearing
liabilities............. 235,562 9,451 4.01% 157,455 6,320 4.01% 130,360 5,118 3.93%
Noninterest-bearing demand
accounts................ 80,508 59,648 49,438
--------- ---------- ---------
Total deposits and
interest-bearing
liabilities............. 316,070 217,103 179,798
Other noninterest-bearing
liabilities............... 2,240 2,532 865
--------- ---------- ---------
Total liabilities......... 318,310 219,635 180,663
Stockholders' equity......... 20,121 19,205 16,849
--------- ---------- ---------
Total liabilities and
stockholders' equity.... $ 338,431 $ 238,840 $ 197,512
========= ========== =========
Net interest income.......... $ 15,348 $ 12,234 $ 11,328
========= ========= ========
Net interest spread.......... 4.05% 4.49% 5.14%
======= ====== =======
Net interest margin.......... 4.99% 5.60% 6.25%
======= ====== =======
Ratio of average interest-
earning assets to average
total deposits and
interest-bearing
liabilities................ 130.60% 138.71% 139.20%
====== ====== =======
Return on average assets..... 0.43% 0.69% 1.08%
====== ====== =======
Return on average equity..... 7.30% 8.52% 12.68%
====== ====== ========
Dividend payout ratio........ 0.00% 0.00% 0.00%
====== ====== =======
Ratio of average equity to
average assets............. 5.95% 8.04% 8.53%
====== ====== =======
</TABLE>
(1) Average balances are based on daily averages and include nonaccrual loans.
Loan fees are included in interest income as follows: 1999 -- $924,000;
1998 -- $560,000; 1997 -- $602,000.
-34-
<PAGE>
The following table illustrates the changes in the Company's net interest
income due to changes in volume and changes in interest rate on a full tax
equivalent basis. Changes attributable to the combined effect of volume and
interest rate have been allocated proportionately to the change due to volume
and the change due to interest rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
VS. VS.
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
INCREASE (DECREASE) INCREASE (DECREASE)
IN NET INTEREST INCOME IN NET INTEREST INCOME
DUE TO CHANGES IN (1) DUE TO CHANGES IN (1)
---------------------------------------- ---------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- ------------ -------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans:
Commercial Loans..................... $ 2,443 $ (398) $ 2,045 $ 1,107 $(270) $ 837
Real estate -- mortgage.............. (158) 4 (154) 53 (10) 43
Real estate -- construction.......... 703 (81) 622 421 (100) 321
Consumer loans....................... 304 (54) 250 (56) (8) (64)
--------- --------- ------------ -------- --------- -------------
Total loans........................ 3,292 (529) 2,763 1,525 (388) 1,137
Securities:
U.S. government securities........... 3,807 295 4,102 743 (509) 234
Municipal -- nontaxable(1)........... 94 (253) (159) 357 43 400
Municipal -- taxable................. (41) (2) (43) (225) (18) (243)
--------- --------- ------------ -------- --------- -------------
Total securities................... 3,860 40 3,900 875 (484) 391
Interest-bearing deposits at other banks -- -- -- -- -- --
Federal funds sold..................... (389) (29) (418) 595 (25) 570
--------- --------- ------------ -------- --------- -------------
Total interest-earning assets...... 6,763 (518) 6,245 2,995 (897) 2,098
--------- --------- ------------ -------- --------- -------------
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand deposits..... 603 (209) 394 305 (51) 254
Certificates of deposit.............. 1,505 (366) 1,139 1,015 114 1,129
-----
Savings deposits..................... 178 (65) 113 27 (12) 15
--------- --------- ------------ -------- --------- -------------
Total interest-bearing accounts.... 2,286 (640) 1,646 1,347 51 1,398
Notes payable.......................... 1,385 (64) 1,321 (94) 6 (88)
Federal funds purchased................ 193 (29) 164 (108) -- (108)
--------- --------- ------------ -------- --------- -------------
Total interest-bearing liabilities. 3,864 (733) 3,131 1,145 57 1,202
--------- --------- ------------ -------- --------- -------------
Total increase (decrease) in net
interest income........... $ 2,899 $ 215 $ 3,114 $ 1,850 $(954) $ 896
========= ========= ============ ======== ========= =============
</TABLE>
- ------------------------
(1) This table is calculated on a full tax-equivalent basis.
-35-
<PAGE>
MARKET RISK MANAGEMENT
Market risk arises from changes in interest rates. The Company has risk
management policies to monitor and limit exposure to market risk as discussed
below. See "Asset/Liability Management." Disclosures about the fair value of
financial instruments, which reflect changes in market prices and rates, can be
found in Note 20 of Notes to Consolidated Financial Statements.
ASSET/LIABILITY MANAGEMENT
The Company's results of operations depend substantially on its net
interest income. Like most financial institutions, the Company's interest income
and cost of funds are affected by general economic conditions and by competition
in the marketplace.
The function of asset/liability management is to manage the risk/return
relationships between capital adequacy, market risk, liquidity and interest rate
risk. To manage these relationships, the Bank uses the following items: equity,
free capital, debt/capital, liquidity, volatile liability coverage, portfolio
maturities, maturing assets and maturing liabilities. In addition, in reviewing
the needs of the Bank with regard to proper management of its asset/liability
program, the Company's management has projected its needs into the future,
taking into consideration historical periods of high loan demand, low deposit
balances, projected loan increases (due to increased demand through marketing),
and interest rate changes (as projected by consulting economists). The Bank's
Asset and Liability Management Committee is responsible for establishing
procedures that enable the Company to achieve its goals while adhering to
prudent banking practices and existing loan and investment policies.
The excess of the Bank's interest-earning assets over its interest-bearing
liabilities have generally been invested in securities when suitable lending
opportunities have not been sufficient to use such excess funds. The Bank's
securities portfolio plays an important part in the overall asset/liability
management program and is a major contributor to the Company's financial
results. The primary objectives in the overall management of the securities
portfolio are safety, liquidity, yield, interest rate risk and pledging for
public deposits.
The securities designated as available for sale generally are more liquid
and have a shorter term than those designated as held to maturity. In connection
with the preparation of its Consolidated Financial Statements, the Company has
designated securities with a carrying value of $110,080,000 as available for
sale. These securities are to be available for sale to assist management in
providing an adequate asset/liability and liquidity management program for the
Bank. Securities designated as held to maturity typically have less liquidity
and also have less call protection than those held for sale.
A critical element of the Company's asset/liability management program is
management of exposure to interest rate risk. Exposure to interest rate risk
arises from volatile interest rates and changes in the balance sheet mix. The
Bank's policy is to control the exposure of its earnings to changing interest
rates by generally maintaining a position within a narrow range around an
"earnings neutral position," which is defined as the mix of assets and
liabilities that generate a net interest margin that is least affected by
interest rate changes. The Bank uses a measurement tool known as dollar duration
to help maintain an earnings neutral position. Dollar duration measures the
percentage of loss or gain that the portfolio would sustain with a 100 basis
point parallel shift in applicable interest rates.
In order to control interest rate risk in a rising interest rate
environment, or when management believes there is a significant risk of rising
interest rates, management's philosophy is generally to reduce the dollar
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<PAGE>
duration of the investment portfolio in order to achieve a more asset sensitive
position, thereby allowing quicker repricings and maximizing net interest
margin. Conversely, in a declining interest rate environment, management's
philosophy is to increase the dollar duration of the investment portfolio,
thereby becoming more liability sensitive. Management would ideally take steps
to increase dollar duration at the time of a peak in interest rates or during
the stabilization period prior to the anticipated decline of rates. This
strategy provides that rates on the investments are locked in at higher levels
and enhances the effect on net interest margin. The Bank decreases the dollar
duration of its investment portfolio by taking steps to increase the coupon rate
and decrease the average life (the period for which a security is actually held
as opposed to its stated maturity) of the securities held in the portfolio. The
Bank increases the dollar duration of its investment portfolio by taking steps
to decrease the coupon rate and increase the average life of the securities held
in the portfolio.
The Bank anticipates that the Federal Reserve Board will not encourage any
substantial change in interest rates in 2000. As of December 31, 1999, the
dollar duration of the investment portfolio was 4.50 compared to 3.50 at
December 31, 1998. The increase in dollar duration for 1999 reflects
Management's replacement of investments which matured with investments that had
slightly lower yields and longer maturities, which lower yields and long
maturities were due to stable interest rates in the first two quarters of 1999
when the majority of the new bond purchases occurred, and slightly higher rates
in the last two quarters of 1999. The decision resulted in increasing the dollar
duration of the portfolio, and decreasing the gross yield on the portfolio from
6.80% to 6.46%. The Company's merger agreement with Gold Banc restricted its
ability to engage in additional transactions which would have had the result of
limiting the increase in dollar duration. The Company may also engage in hedging
transactions to control interest rate risk. The effect of these efforts in any
given period may be to negatively impact reported net non-interest income and
the interest earned on the securities.
Although analysis of interest rate gap (the difference between the
repricing of interest-earning assets and interest-bearing liabilities during a
given period of time) is one standard tool for the measurement of exposure to
interest rate risk, the Company believes that because interest rate gap analysis
does not address all factors that can affect earnings performance, such as early
withdrawal of time deposits and prepayment of loans, it should not be used as
the primary indicator of exposure to interest rate risk and the related
volatility of net interest income in a changing interest rate environment.
Interest rate gap analysis is primarily a measure of liquidity based upon the
amount of change in principal amounts of assets and liabilities outstanding, as
opposed to a measure of changes in the overall net interest margin. The Company
believes that since interest rate risk is caused by a combination of (i)
differing volumes of re-pricing assets and liabilities (i.e. gaps), (ii)
variability of interest rate changes (i.e. multiples) and (iii) variability of
occurrence of rate changes for various classes of assets and liabilities (i.e.
lags), that its system of measuring the effect of each of these factors is a
preferable tool for management of interest rate risk.
The Bank has contracted with a consulting firm to assist it with economic
outlook, interest rate forecasting, asset/liability management and purchase
and/or sale of securities. This firm does not have discretionary authority to
act on behalf of the Company.
-37-
<PAGE>
The following table sets forth the estimated maturity or repricing, and
the resulting interest rate gap, of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1999. The amounts in the table are
derived from internal data from the Company. The amounts are based upon
regulatory reporting formats and, therefore, may not be consistent with
financial information appearing elsewhere in this Form 10-KSB that has been
prepared in accordance with generally accepted accounting principles. The
amounts could be significantly affected by external factors such as changes in
prepayment assumptions, early withdrawals of deposits and competition.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
ESTIMATED MATURITY OR REPRICING
-------------------------------------------------------------------
LESS THAN THREE
THREE MONTHS TO ONE YEAR TO OVER FIVE
MONTHS ONE YEAR FIVE YEARS YEARS TOTAL
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest-earnings assets:
Fixed rate loans............................ $ 7,365 $ 10,609 $ 21,034 $ -- $ 39,008
Floating rate loans......................... 113,998 2,749 28,870 -- 145,617
Investment securities....................... 5,607 4,135 113,612 19,634 142,988
FHLB stock.................................. 1,984 -- -- -- 1,984
Federal funds sold.......................... -- -- -- -- --
------------ ------------ ------------ ----------- -----------
Total interest-earning assets............ 128,954 17,493 163,516 19,634 329,597
------------ ------------ ------------ ----------- -----------
Interest-bearing liabilities:
Interest-bearing demand deposits............ 27,348 -- -- -- 27,348
Money market deposits....................... 78,403 -- -- -- 78,403
Certificates of deposits under $100,000..... 8,733 22,957 2,865 -- 34,555
Certificates of deposits over $100,000...... 23,219 15,593 3,163 -- 41,975
Savings deposits............................ 19,382 -- -- -- 19,382
Notes payable............................... 25,000 3,600 -- 10,304 38,904
Federal funds purchased..................... 8,500 -- -- -- 8,500
------------ ------------ ------------ ----------- -----------
Total interest-bearing liabilities....... 190,585 42,150 6,028 10,304 249,067
------------ ------------ ------------ ----------- -----------
Interest rate gap.............................. $(61,631) $(24,657) $ 157,488 $ 9,330
============ ============ ============ ===========
Cumulative interest rate gap................... $(61,631) $(86,288) $ 71,200 $ 80,530 $ 80,530
============ ============ ============ =========== ===========
Cumulative interest rate gap to
total assets................................ (17.19)% (24.06)% 19,86% 22.46%
============ ============ ============ ===========
Total consolidated assets...................... $ 358,586
============
</TABLE>
-38-
<PAGE>
The following table presents at the date indicated (i) the aggregate loans
by maturity in each major category of the Company's loan portfolio and (ii) the
aggregate amounts of variable and fixed rate loans that mature after one year.
Actual maturities may differ from the contractual maturities shown below as a
result of renewals and prepayments. Management estimates that approximately $16
million of loans maturing during the year ending December 31, 2000 will actually
be paid off in cash during that period.
DECEMBER 31, 1999
-----------------------------------------
LESS THAN ONE YEAR TO OVER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
-------- -------- ------- --------
Commercial Loans.................... $ 47,345 $ 53,152 $33,481 $133,978
Real estate -- construction loans... 16,698 4,330 984 22,012
Real estate -- mortgage loans....... 100 1,238 4,442 5,780
Consumer loans...................... 7,194 12,425 3,236 22,855
-------- -------- ------- --------
Total......................... $ 71,337 $ 71,145 $42,143 $184,625
======== ======== ======= ========
Fixed rate loans.................... $ 26,841 $ 6,542
Floating rate loans................. 44,304 35,601
-------- -------
Total......................... $ 71,145 $42,143
======== =======
RESULTS OF OPERATIONS
Years ended December 31, 1999 and 1998
Overview. Net income decreased $169,000 for 1999 to $1,468,000 from
$1,637,000. This decrease was primarily as a result of a $3,167,000 increase in
net interest income, a $51,000 decrease in provision for loan loss and a
$659,000 increase in noninterest income, offset by a $4,047,000 increase in
noninterest expense. Return on average assets and return on average equity were
.44% and 7.30%, respectively, for 1999 compared to .69% and 8.52%, respectively,
for 1998.
Interest Income. Interest income increased $6,298,000 to $24,215,000 for
1999 from $17,917,000 for 1998. Interest income from loans increased $2,763,000,
interest income on securities increased $3,953,000 in 1999 and interest income
on federal funds sold decreased $418,000 in 1999. The increase in interest
income on loans was primarily a result of an increase in commercial and real
estate construction loans made by the Bank. The net increase in interest income
on securities and federal funds sold was primarily a result of the investment by
the Bank of excess customer deposits.
Interest Expense. Interest expense increased $3,131,000 to $9,451,000 for
1999 from $6,320,000 in 1998. Interest expense on interest-bearing deposits
increased $1,646,000, interest expense on federal funds purchased increased
$164,000, and interest expense on the notes payable increased $1,321,000 in
1999. The increase in interest expense on interest-bearing deposits was
primarily due to greater deposit volume in 1999. The rates paid on
interest-bearing deposits were relatively unchanged between 1998 and 1999. The
increase in interest expense on the notes payable was due to the increase in
borrowings from the FHLB.
Net Interest Income. Net interest income increased $3,167,000 to
$14,764,000 for 1999 from $11,597,000 for 1998. During 1999 average loans
outstanding increased $32,422,000, average securities owned increased
$64,141,000, average Federal Funds sold decreased $7,317,000 and the net
interest spread decreased
-39-
<PAGE>
from 4.49% for 1998 to 4.05% for 1999. The increase in net interest income
resulted primarily from the increase in the volume of interest earning assets,
offset by the increase in the volume of interest bearing deposits.
Noninterest Income. Noninterest income increased $659,000 to $1,621,000
for 1999 from $962,000 for 1998. This increase was primarily due to a $250,000
increase in service charge income, a $223,000 increase in gain on sale of
securities available for sale, and a $186,000 increase in other noninterest
income.
Noninterest Expense. Noninterest expense increased $4,047,000 to
$14,314,000 for 1999 from $10,267,000 for 1998. This increase is a result of the
following factors: (i) salary/benefit expense increased $1,939,000 primarily due
to increased staffing (at the Bank and the six branches) and yearly salary
increases; (ii) occupancy and equipment expense increased $695,000 primarily due
to the opening of two new branches and the acquisition of Lakewood State Bank,
and Year 2000 equipment expenses; (iii) amortization of investment in subsidiary
over net assets acquired increased $307,000 due to the acquisition of Lakewood
State Bank; and (iv) other operating expenses increased $781,000 primarily as a
result of higher costs associated with the opening of two new branches and
acquiring Lakewood State Bank; and (v) $325,000 of costs relating to the merger
agreement with Gold Banc.
PROVISION FOR LOAN LOSSES
The Company's provisions for loan losses in the years ended December 31,
1999, 1998 and 1997 were $227,000, $278,000, and $360,000, respectively. See
"Item 1 - Business - Analysis of Allowance for Loan Losses."
INCOME TAXES
The Company's income tax expense for the years ended December 31, 1999,
1998 and 1997 was $376,000, $377,000, and $851,000, respectively. The Company's
effective tax rate typically differs from the expected 34% enacted tax rate due
to interest income received on tax-exempt securities, which is partially offset
by the amortization of excess of investment in subsidiary over net assets
acquired.
LIQUIDITY AND SOURCES OF FUNDS
The Company's primary sources of funds are customer deposits, sales and
maturities of investment securities and loan repayments. These funds are used to
make loans, to acquire investment securities and other assets and to fund
continuing operations. During the year ended December 31, 1999, deposits
increased to $290,055,000 from $271,650,000 and $190,076,000 at December 31,
1998 and 1997, respectively. None of the deposits at December 31, 1999, 1998 or
1997 were brokered deposits. Management believes that the increases in deposits
in 1998 and 1999 were the result of (i) the successful opening of the Bank's two
new branches in 1998 and the resulting increase in new customers at each branch
and the acquisition of Lakewood State Bank in December of 1998; (ii) referrals
from existing customers; (iii) continued success of the Bank's Officer Call
Program; and (iv) recent bank acquisition activity in Colorado which has
improved the Bank's opportunities to attract new business from customers in its
small and medium-sized business focus area. See "Item 1 - Business - Operating
Strategy" and "- Growth Strategy." At December 31, 1999, net loans were
$181,733,000 compared to $144,517,000 and $120,659,000 at December 31, 1998 and
1997, respectively.
-40-
<PAGE>
In December 1998, Union Bankshares Capital Trust I, a newly formed
Delaware business trust completed the sale of $10.3 million of 9% Cumulative
Trust Preferred Securities, guaranteed on a subordinated basis by the Company.
The Company contributed $7 million of the proceeds of the offering to the Bank
to finance the acquisition of Lakewood State Bank. The remainder of the proceeds
was used for general corporate purposes, including the payoff of all outstanding
amounts to NationsBank under the Loan Agreement. The Company also terminated the
revolving line of credit it maintained with NationsBank.
The Company has successfully negotiated with Exchange National Bank for a
revolving line of credit in an amount not to exceed $3,000,000. Any monies
advanced under this line would be used solely for capital needs of the Company
or to purchase the stock of banks or bank holding companies. This line of credit
would be available for one year only, with renewals to be negotiated each year.
If any principal is advanced on this line, the terms of the repayment would also
be negotiated depending upon the use of proceeds. Interest would be due
quarterly. There is currently no amount outstanding under this line of credit.
The line of credit is secured by the pledge of all of the shares of capital
stock of the Bank, and contains standard representations, warranties and
covenants.
Annual renewal of the line of credit is based on the compliance by the
Bank with the following criteria:
1. Capital Ratio of not less than 6.25%;
2. Return on Average Assets of not below 1.00%;
3. Loan Loss Reserve/Total Loans Ratio of not below 1.00%;
4. Non-Performing Loans/Total Loans Ratio of not greater than 2.00%;
5. Debt Service Coverage Ratio of not less than 2:1; and
6. Absence of regulatory dividend restrictions.
In the event the Bank does not meet any of these criteria calculated as of
December 31 of each year and based on its financial statements, the Company will
have 90 days from the delivery of the financial statements to cure the
deficiency.
Management anticipates that the Company will continue to rely primarily on
customer deposits, sales and maturities of investment securities, loan sales,
and loan repayments, as well as retained earnings, to provide liquidity and will
use funds so provided primarily to make loans and to purchase securities. The
Company believes that its customer deposits provide a strong source of liquidity
because of the high percentage of core deposits, many of which are held as
compensating balances under long-standing loan relationships. As a secondary
source of funds, management uses federal funds and its membership in the FHLB.
See "Item 1 - Business - Source of Funds."
CAPITAL RESOURCES
The Company's total stockholders' equity decreased to $19,383,000 at
December 31, 1999 from $20,344,000 at December 31, 1998. This decrease is a
result of an increase in retained earnings of $1,504,000 relating to 1999 net
income and income tax benefit from employee stock option exercises, an increase
in common stock surplus of $30,000 relating to issuance of stock to the outside
Directors in lieu of their annual retainer and
-41-
<PAGE>
$153,000 relating to the exercise of stock options, a $233,000 increase related
to the cumulative effect of an accounting change for transfer of securities from
held-to-maturity to available for sale, and a decrease in unrealized gains on
investment securities available for sale of $2,881,000. At December 31, 1999,
stockholders' equity was 5.4% of total assets, compared to 6.5% of total assets
at December 31, 1998. Management presently intends to retain earnings, if any,
to support growth. Accordingly, the Company does not intend to pay cash
dividends on its Common Stock in the foreseeable future.
Federal Reserve Board and FDIC guidelines call for a 4% Tier I capital to
risk-weighted assets ratio, 8% total capital to risk-weighted assets ratio, and
a 4% leverage ratio. See "Item 1 - Business - Government Regulation - The
Company - Capital Adequacy" and "- The Bank - Capital Adequacy." The Company and
the Bank currently exceed the applicable regulatory capital requirements. The
Company contributed $7.0 million of the net proceeds of the offering of the 9%
Cumulative Trust Preferred Securities to the Bank to enhance its regulatory
capital levels to support continued asset growth. The following table sets forth
the Company's and the Bank's capital ratios at December 31, 1999.
DECEMBER 31, 1999
----------------------
(DOLLARS IN THOUSANDS)
Company
Tier I Capital....................................... $ 22,339
Total Capital........................................ 28,393
Risk-Weighted Assets................................. 223,944
Tier I Capital to Risk-Weighted Assets............... 9.98%
Total Capital to Risk-Weighted Assets................ 12.68%
Leverage Ratio....................................... 6.37%
Bank
Tier I Capital....................................... $ 19,554
Total Capital........................................ 22,309
Risk-Weighted Assets................................. 220,280
Tier I Capital to Risk-Weighted Assets............... 8.88%
Total Capital to Risk-Weighted Assets................ 10.12%
Leverage Ratio....................................... 5.65%
Bank management is anticipating 2000 capital expenditures of approximately
$780,000 in connection with updating its internal operating systems. The Bank
intends to use part of its anticipated income in 2000 to finance these
expenditures.
Management expects that the current capital levels, together with
internally generated funds, will be sufficient to support the Company's
operations for the foreseeable future. However, depending upon the nature and
scale of the Company's acquisition opportunities, the Company may be required to
obtain additional capital resources through borrowing or the issuance of
additional securities. The Company's ability to incur additional indebtedness
may be limited by government regulations. See "Item 1 - Business - Government
Regulation."
-42-
<PAGE>
EFFECTS OF INFLATION AND CHANGING PRICES
The primary impact of inflation on the Company's operations is increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates. The effects of inflation,
however, can magnify the growth of assets in the banking industry. If
significant, this would require that equity capital increase at a faster rate
than would otherwise be necessary.
IMPACT OF YEAR 2000
Year 2000 Compliance. Some computer programs are written using two digits
rather than four to define the applicable year. As a result, those compute
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than 2000. This could cause a system failure or miscalculation
causing disruption of operation including, among other things, a temporary
inability to process transactions, pay invoices or engage in similar, normal
business activities.
The Company adopted and implemented a Year 2000 Project Management Plan in
recognition of the potential problems presented by the Year 2000. The Company's
total Year 2000 project costs were approximately $500,000. These costs were
expensed as incurred. The Company experienced no major problems or interruptions
to date associated with Year 2000 issues. The Company cannot guarantee that
there will not be other unforeseen Year 2000 problems that may manifest
themselves in the future.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements which are not historical facts contained in this document are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ from projected results. Factors that could cause actual
results to differ materially include, among others: management's ability to
integrate the operations of Lakewood State Bank, continued success of the Bank's
branching strategy, general economic conditions, economic conditions in the
Denver metropolitan area, the monetary policy of the Federal Reserve Board,
changes in interest rates, inflation, competition in the banking business,
changes in the state and federal regulatory regime applicable to the Company's
and the Bank's operations, the results of financing efforts and other risk
factors contained herein and detailed elsewhere in the Company's filings with
the Securities and Exchange Commission.
Information included in this document includes "forward-looking
statements," which can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "anticipate," "believe," "estimate," or
"continue," or the negative thereof or other variations thereon or comparable
terminology. The statements in "risk factors" and other statements and
disclaimers in this Annual Report on From 10-KSB constitute cautionary
statements identifying important factors, including certain risks and
uncertainties, with respect to such forward- looking statements that could cause
actual results to differ materially from those reflected in such forward-looking
statements.
ITEM 7. FINANCIAL STATEMENTS
See Index to Financial Statements appearing in Item 13 on Page 46.
-43-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-44-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference to the
information set forth under the similarly titled captions contained in the
definitive Proxy Statement to be used by the Company in connection with its 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than April 30, 2000.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information set forth under the similarly titled caption contained in the
definitive Proxy Statement to be used by the Company in connection with its 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than April 30, 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth under the similarly titled caption contained in the
definitive Proxy Statement to be used by the Company in connection with its 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than April 30, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information set forth under the similarly titled caption contained in the
definitive Proxy Statement to be used by the Company in connection with its 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than April 30, 2000.
-45-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Financial Statements
PAGE REFERENCE
Reports of Independent Accountants
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Exhibits
See Exhibit Index on Page E-1 of this Form 10-KSB.
(b) Reports on Form 8-K
Form 8-K filed on March 17, 2000. Items 5 and 7 reported.
-46-
<PAGE>
UNION BANKSHARES, LTD.
Independent Accountants' Report and Consolidated Financial Statements
December 31, 1999, 1998 and 1997
<PAGE>
UNION BANKSHARES, LTD.
DECEMBER 31, 1999, 1998 AND 1997
TABLE OF CONTENTS
PAGE
INDEPENDENT ACCOUNTANTS' REPORT.............................................F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets............................................................F-2
Statements of Income......................................................F-4
Statements of Comprehensive Income........................................F-6
Statements of Stockholders' Equity........................................F-7
Statements of Cash Flows..................................................F-9
Notes to Financial Statements............................................F-11
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Union Bankshares, Ltd.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of UNION
BANKSHARES, LTD. as of December 31, 1999 and 1998, and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of UNION
BANKSHARES, LTD. as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
As described in Note 2, in 1999 the Company changed its method of accounting
for certain financial instruments to adopt Financial Accounting Standards Board
Statement No. 133.
BAIRD KURTZ & DOBSON
Colorado Springs, Colorado
February 25, 2000
Except for Note 21 as to which the date is March 17, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
UNION BANKSHARES, LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
------
1999 1998
---- ----
<S> <C> <C>
Cash and due from banks $ 15,493,000 $ 18,914,000
Federal funds sold -- 26,505,000
------------ ------------
Total Cash and Cash Equivalents 15,493,000 45,419,000
Held-to-maturity securities 32,908,000 27,469,000
Available-for-sale securities 110,080,000 77,594,000
Other investments 1,984,000 988,000
Loans, net 181,733,000 144,517,000
Mortgage loans held for sale -- 4,285,000
Excess of cost over fair value of net
assets acquired, net of amortization 6,630,000 7,169,000
Premises and equipment 3,309,000 3,276,000
Accrued interest receivable 2,586,000 1,542,000
Other assets 3,863,000 2,318,000
------------ ------------
TOTAL ASSETS $358,586,000 $314,577,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1999 1998
---- ----
<S> <C> <C>
LIABILITIES
Deposits:
Demand $ 88,392,000 $ 78,017,000
NOW 27,348,000 25,852,000
Money Market 78,403,000 65,452,000
Savings 19,382,000 19,221,000
Time 76,530,000 83,108,000
------------- ------------
Total Deposits 290,055,000 271,650,000
Notes payable 28,600,000 10,000,000
Guaranteed Preferred Beneficial Interests
In Company's Debentures 10,304,000 10,304,000
Federal funds purchased 8,500,000 --
Accrued interest payable 382,000 471,000
Other liabilities 1,362,000 1,808,000
------------- ------------
Total Liabilities 339,203,000 294,233,000
------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized
1,355,790 shares; issued and outstanding -0- shares -- --
Common stock, $.001 par value; authorized
10,000,000 shares; issued and outstanding
1999 - 2,373,914 shares; 1998 - 2,342,014 shares 2,000 2,000
Additional paid-in capital 9,822,000 9,639,000
Retained earnings 11,564,000 10,060,000
Accumulated other comprehensive income:
Unrealized appreciation on available-for-sale securities,
net of applicable income taxes of $(1,183,000) and $365,000 (2,005,000) 643,000
------------- ------------
in 1999 and 1998
Total Stockholders' Equity 19,383,000 20,344,000
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 358,586,000 $314,577,000
============= ============
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $15,348,000 $12,585,000 $11,448,000
Interest on investment securities:
U.S. government agencies and corporations 7,223,000 3,121,000 2,887,000
State and other political subdivisions 1,266,000 1,415,000 1,399,000
Interest on federal funds sold and
interest-bearing deposits in other banks 378,000 796,000 226,000
----------- ----------- -----------
Total interest income 24,215,000 17,917,000 15,960,000
----------- ----------- -----------
INTEREST EXPENSE
Deposits 7,165,000 5,519,000 4,121,000
Federal funds purchased 166,000 2,000 110,000
Notes payable 2,120,000 799,000 887,000
----------- ----------- -----------
Total interest expense 9,451,000 6,320,000 5,118,000
----------- ----------- -----------
NET INTEREST INCOME 14,764,000 11,597,000 10,842,000
PROVISION FOR LOAN LOSSES 227,000 278,000 360,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 14,537,000 11,319,000 10,482,000
----------- ----------- -----------
NONINTEREST INCOME
Service charges 655,000 405,000 371,000
Gain on sale of available-for-sale securities, net 266,000 43,000 101,000
Other 700,000 514,000 486,000
----------- ----------- -----------
Total noninterest income 1,621,000 962,000 958,000
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
<TABLE>
<CAPTION>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NONINTEREST EXPENSE
Salaries and employee benefits 7,250,000 5,311,000 4,477,000
Amortization of excess of cost over
fair value of net assets acquired 539,000 232,000 226,000
Occupancy and equipment 2,232,000 1,537,000 1,232,000
Other operating expenses 4,293,000 3,187,000 2,518,000
----------- ----------- ----------
Total noninterest expense 14,314,000 10,267,000 8,453,000
----------- ----------- ----------
INCOME BEFORE INCOME TAXES 1,844,000 2,014,000 2,987,000
INCOME TAXES 376,000 377,000 851,000
----------- ----------- ----------
NET INCOME $ 1,468,000 $ 1,637,000 $2,136,000
=========== =========== ==========
EARNINGS PER SHARE
BASIC
Net income $ .62 $ .70 $ .92
Weighted average number of common
shares outstanding 2,352,540 2,339,119 2,317,056
Net income $ .55 $ .62 $ .84
Weighted average number of common
shares outstanding 2,649,473 2,622,753 2,534,904
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET INCOME $ 1,468,000 $ 1,637,000 $ 2,136,000
OTHER COMPREHENSIVE (LOSS) INCOME
Unrealized appreciation (depreciation) on
available-for-sale securities, net of income
taxes ($1,564,000), $195,000, and $-0-,
for December 31, 1999, 1998,
and 1997, respectively (2,714,000) 416,000 --
LESS: reclassification adjustment for realized
(gain) losses included in net income, net of
income taxes of $99,000, $15,000, and 38,000,
for December 31, 1999, 1998, and 1997,
respectively (167,000) (26,000) (63,000)
Unrealized appreciation on investment securities
transferred from available-for-sale to held-to-
maturity including amortization -- -- (32,000)
----------- ----------- -----------
COMPREHENSIVE (LOSS) INCOME
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $(1,413,000) $ 2,027,000 $ 2,041,000
Cumulative effect of accounting change for
transfer of securities from held-to-maturity to
available-for-sale, net of income taxes of
$115,000 233,000 -- --
----------- ----------- -----------
COMPREHENSIVE (LOSS) INCOME $(1,180,000) $ 2,027,000 $ 2,041,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
<TABLE>
<CAPTION>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accumulated Other
Comprehensive
Income
Unrealized
Appreciation
(Depreciation)
on
Additional Available-
Paid-in for-Sale Retained
Shares Amount Capital Securities Earnings Total
--------- ------ ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 2,299,964 $2,000 $9,434,000 $ 348,000 $ 6,248,000 $16,032,000
Shares issued for stock option plan 32,050 -- 149,000 -- -- 149,000
Net change in unrealized appreciation
of available-for-sale securities,
net of income taxes of $33,000 -- -- -- (63,000) -- (63,000)
Net change in unrealized appreciation on
investment securities transferred from
available-for-sale to held-to-maturity
including amortization -- -- -- (32,000) -- (32,000)
Net income -- -- -- -- 2,136,000 2,136,000
--------- ------ ---------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1997 2,332,014 2,000 9,583,000 253,000 8,384,000 18,222,000
Shares issued for stock option plan 10,000 -- 56,000 -- -- 56,000
Net change in unrealized appreciation
of available-for-sale securities,
net of income taxes of $249,000 -- -- -- 390,000 -- 390,000
Increase in retained earnings due to
stock option plans -- -- -- -- 39,000 39,000
Net income -- -- -- -- 1,637,000 1,637,000
--------- ------ ---------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1998 2,342,014 $2,000 $9,639,000 $ 643,000 $10,060,000 $20,344,000
========= ====== ========== ========= =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
<TABLE>
<CAPTION>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accumulated Other
Comprehensive
Income
Unrealized
Appreciation
(Depreciation)
on
Additional Available-
Paid-in for-Sale Retained
Shares Amount Capital Securities Earnings Total
--------- ------ ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998
(brought forward) 2,342,014 2,000 9,639,000 643,000 10,060,000 20,344,000
Shares issued for stock option plan 31,900 -- 183,000 -- -- 183,000
Cumulative effect of accounting change
for transfer of securities from held-to-
maturity to available-for-sale, net of
income taxes of $115,000 -- -- -- 233,000 -- 233,000
Net change in unrealized appreciation
of available-for-sale securities,
net of income taxes of $(1,663,000) -- -- (2,881,000) -- (2,881,000)
Increase in retained earnings due to
stock option plans -- -- -- 36,000 36,000
Net income -- -- -- -- 1,468,000 1,468,000
--------- ------ ---------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1999 2,373,914 $2,000 $9,822,000 $(2,005,000) $11,564,000 $19,383,000
========= ====== ========== =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE>
<TABLE>
<CAPTION>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,468,000 $ 1,637,000 $ 2,136,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of securities (266,000) (41,000) (101,000)
Federal Home Loan Bank stock dividend (88,000) (72,000) (53,000)
Amortization (accretion) of premium/discount on
investments 395,000 455,000 (140,000)
Amortization of deferred loan fees, net of costs (2,002,000) (1,296,000) (955,000)
Deferred income taxes (19,000) (230,000) (216,000)
Provision for loan losses 227,000 278,000 360,000
Depreciation and amortization 625,000 491,000 415,000
Amortization of excess of cost over fair value of
net assets acquired and offering costs 615,000 232,000 226,000
Loss on sale of premises and equipment 10,000 -- --
Changes in:
Mortgage loans held for sale 4,285,000 (3,032,000) (1,253,000)
Accrued interest receivable (1,044,000) 72,000 (246,000)
Prepaid expenses and other assets (550,000) (581,000) 7,000
Accrued interest payable (89,000) 97,000 92,000
Other liabilities (446,000) 671,000 103,000
------------ ------------ ------------
Net cash provided by (used in) operating
activities 3,121,000 (1,319,000) 375,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 14,091,000 24,932,000 8,809,000
Proceeds from maturities of held-to-maturity securities 7,101,000 6,995,000 8,652,000
Proceeds from sale of available-for-sale securities 18,816,000 2,312,000 13,161,000
Purchase of available-for-sale securities (78,270,000) (55,426,000) (24,077,000)
Purchase of held-to-maturity securities (3,958,000) (6,710,000) (7,003,000)
Purchase of other investments (872,000) -- (369,000)
Net decrease (increase) in loans (35,441,000) 104,000 (21,086,000)
Purchase of Lakewood State Bank, net of cash acquired -- 520,000 --
Proceeds from sale of other real estate 150,000 -- --
Proceeds from sale of premises and equipment 957,000 -- --
Purchase of premises and equipment (1,309,000) (1,306,000) (220,000)
------------ ------------ ------------
Net cash used in investing activities (78,735,000) (28,579,000) (22,133,000)
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-9
<PAGE>
<TABLE>
<CAPTION>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market,
NOW, and savings accounts $ 24,983,000 $ 8,700,000 $ 23,547,000
Net increase in time deposits (6,578,000) 31,543,000 10,120,000
Change in federal funds purchased 8,500,000 -- (6,200,000)
Proceeds from issuance of notes payable 18,600,000 -- 10,000,000
Principal repayments of notes payable -- (2,000,000) (1,500,000)
Proceeds from issuance of common stock 183,000 56,000 149,000
Proceeds from issuance of Guaranteed Preferred
Beneficial Interests in Company's Debentures -- 10,304,000 --
------------ ------------ ------------
Net cash provided by financing activities 45,688,000 48,603,000 36,116,000
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (29,926,000) 18,705,000 14,358,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 45,419,000 26,714,000 12,356,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 15,493,000 $ 45,419,000 $ 26,714,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-10
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Union Bank and Trust (Bank) is a wholly-owned subsidiary of Union
Bankshares, Ltd. (Bankshares) (collectively referred to as Company). The Bank
provides a full range of banking services to customers, primarily living in the
Denver metropolitan area, through its home office and six branch facilities
located in the Denver area. The Bank is subject to competition from other
financial institutions. The Bank is also subject to the regulation of certain
federal and state agencies and undergoes periodic examinations by those
regulatory authorities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
the valuation of foreclosed assets held for sale, management obtains independent
appraisals for significant properties.
Management believes that the allowance for loan losses and the valuation of
foreclosed assets held for sale are adequate. While management uses available
information to recognize losses on loans and foreclosed assets held for sale,
changes in economic conditions may necessitate revision of these estimates in
future years. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses and valuation of foreclosed assets held for sale. Such agencies may
require the Bank to recognize additional losses based on their judgments of
information available to them at the time of their examination.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Union
Bankshares, Ltd. and its wholly-owned subsidiary, Union Bank and Trust. All
significant intercompany balances and transactions have been eliminated.
F-11
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
OPERATING SEGMENTS
The Bank is organized on a branch by branch basis, upon which management
makes decisions regarding how to allocate resources and assess performance. Each
of the branch banks provides a group of similar community banking services,
including such core products and services as loans, time deposits, checking and
saving accounts, as well as products that compliment these core products.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At December 31, 1998, cash
equivalents consisted of federal funds sold.
Pursuant to normal banking practices, the Bank is required to maintain
certain balances (reserves) with the Federal Reserve Bank. Included in cash and
due from banks in the accompanying consolidated balance sheets are required
reserve balances of approximately $225,000 and $4,263,000 at December 31, 1999
and 1998, respectively.
As of December 31, 1999 and 1998, the Company had approximately $5,100,000
and $5,330,000 on deposit with one financial institution.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the future, are
carried at fair value. Realized gains and losses, based on specifically
identified amortized cost of the specific security, are included in other
income. Unrealized gains and losses are recorded, net of related income tax
effects, in stockholders' equity. Premiums and discounts are amortized and
accreted, respectively, to interest income using the level-yield method over the
period to maturity.
Held-to-maturity securities, which include any security for which the
Company has the positive intent and ability to hold until maturity, are carried
at historical cost adjusted for amortization of premiums and accretion of
discounts. Premiums and discounts are amortized and accreted, respectively, to
interest income using the level-yield method over the period to maturity.
Interest and dividends on investments in debt and equity securities are
included in income when earned.
F-12
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
FEE INCOME
Loan origination fees, net of direct origination costs, are recognized as
income using the level-yield method over the term of the loans.
LOANS
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-offs are reported at their outstanding principal
adjusted for any charge-offs, the allowance for loan losses, and any deferred
fees or costs on originated loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions charged to expense
and reduced by loans charged off, net of recoveries. The allowance is maintained
at a level considered adequate to provide for potential loan losses, based on
management's evaluation of the loan portfolio, as well as on prevailing and
anticipated economic conditions and historical losses by loan category. General
allowances have been established, based upon the aforementioned factors, and
allocated to the individual loan categories, including consumer loans and real
estate mortgage loans that are collectively evaluated. Allowances are accrued on
specific loans evaluated for impairment for which the basis of each loan,
including accrued interest, exceeds the discounted amount of expected future
collections of interest and principal or, alternatively, the fair value for loan
collateral using a single risk category method of identification.
A loan is considered impaired when it is probable that the Bank will not
receive all amounts due according to the contractual terms of the loan. This
includes loans that are delinquent 90 days or more (nonaccrual loans) and
certain other loans identified by management. Accrual of interest is generally
discontinued, and interest accrued and unpaid is removed, at the time such
amounts are delinquent 90 days. Interest is recognized for nonaccrual loans only
upon receipt, and only after all principal amounts are current according to the
terms of the contract. Loans are charged off when, in the opinion of management,
all or a portion of the principal outstanding is no longer collectible.
F-13
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are normally sold within 120 days of
origination and are carried at the lower of cost or market. Gains and losses
resulting from sales of mortgage loans are recognized when the respective loans
are sold to investors. Gains and losses are determined by the difference between
the selling price and the carrying amount of the loans sold, net of discounts
collected or paid and considering a normal servicing rate.
PREMISES AND EQUIPMENT
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are capitalized and
amortized using the straight-line method over the terms of the respective leases
or the estimated useful lives of the improvements, whichever is shorter.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The Company purchased a subsidiary in 1985 in which the excess costs over
the fair value of certain underlying net tangible assets were amortized over a
period of nine years. The remaining excess costs over the fair value of the net
assets are being amortized on a straight-line basis over a 25 year period at a
rate of approximately $226,000 per year. The excess cost over purchase price of
the branch bank acquired in 1998 is also being amortized on a straight-line
basis over a 15 year life at an annual rate of $313,000 through 2014.
Amortization expense related to the purchased subsidiary and branch bank in 1999
and 1998 was $539,000 and $232,000, respectively.
FORECLOSED ASSETS HELD FOR SALE
Assets acquired by foreclosure or in settlement of debt and held for sale
are valued at estimated fair value as of the date of foreclosure, and a related
valuation allowance is provided for estimated costs to sell the assets.
Management evaluates the value of foreclosed assets held for sale periodically
and increases the valuation allowance for any subsequent declines in fair value.
Increases in the valuation allowance and gains/losses on sales of foreclosed
assets are included in noninterest expense, net.
F-14
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
DEBT ISSUANCE COSTS
Debt issuance costs associated with the issuance of the 9.0% Cumulative
Trust Preferred Securities are being amortized over a ten year period.
Amortization expense was $76,000 and $2,000 for the year ended December 31, 1999
and 1998, respectively.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
EARNINGS PER COMMON SHARE
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during each period.
Diluted earnings per share is computed assuming exercise of all stock
options having exercise prices less than the average market price of the common
stock using the treasury stock method.
All share and per share amounts have been restated to reflect the
two-for-one stock split which was voted on and approved by stockholders on
May 27, 1998.
NOTE 2: CHANGE IN ACCOUNTING PRINCIPLE
At the beginning of 1999, the Company adopted Financial Accounting Standards
Board Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The provisions of the statement provide that at the time of initial
adoption an entity may transfer any held-to-maturity security into the
available-for-sale category. The Company transferred $6,592,000 of
held-to-maturity securities to available-for-sale, resulting in the adjustment
of these securities to fair value and an increase in comprehensive income net of
tax of $233,000. The cumulative effect of adoption is reflected in the Statement
of Comprehensive Income for 1999, with no effect on prior years. The Company's
investment securities do not contain derivatives nor does the Company
participate in hedging activities.
F-15
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3: INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost and approximate fair value of held-to-maturity securities
was as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------- ---------- ------------ -----------
1999:
- -----
<S> <C> <C> <C> <C>
U.S. Government agencies and
corporations $29,176,000 $ 65,000 $ (942,000) $28,299,000
Obligations of state and political
subdivisions 3,732,000 102,000 -- 3,834,000
----------- --------- ------------ -----------
$32,908,000 $ 167,000 $ (942,000) $32,133,000
=========== ========= ============ ===========
1998:
- -----
U.S. Government agencies and
corporations $21,591,000 $ 501,000 $ (12,000) $22,080,000
Obligations of state and political
subdivisions 5,878,000 462,000 -- 6,340,000
----------- --------- ------------ -----------
$27,469,000 $ 963,000 $ (12,000) $28,420,000
=========== ========= ============ ===========
</TABLE>
Maturities of held-to-maturity securities at December 31, 1999:
Amortized Approximate
Cost Fair Value
----------- -----------
One year or less $ 1,572,000 $ 1,566,000
After one year through five years 1,769,000 1,769,000
After five years through ten years 7,055,000 6,895,000
After ten years 22,512,000 21,903,000
----------- -----------
$32,908,000 $32,133,000
=========== ===========
F-16
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3: INVESTMENTS IN DEBT AND EQUITY SECURITIES (CONTINUED)
The amortized cost and approximate fair value of available-for-sale
securities was as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------ ----------- ------------- ------------
1999:
- -----
<S> <C> <C> <C> <C>
U.S. Government agencies and
corporations $ 90,071,000 $ 44,000 $ (3,087,000) $ 87,028,000
Obligations of state and political
subdivisions 23,195,000 265,000 (408,000) 23,052,000
------------ ----------- ------------- ------------
$113,266,000 $ 309,000 $ (3,495,000) $110,080,000
============ =========== ============= ============
1998:
- -----
U.S. Government agencies and
corporations $ 54,438,000 $ 276,000 $ (10,000) $ 54,704,000
U.S. Treasury securities 3,611,000 48,000 -- 3,659,000
Obligations of state and political
subdivisions 18,482,000 774,000 (25,000) 19,231,000
------------ ----------- ------------- ------------
$ 76,531,000 $ 1,098,000 $ (35,000) $ 77,594,000
============ =========== ============= ============
</TABLE>
Maturities of available-for-sale securities at December 31, 1999
Amortized Approximate
Cost Fair Value
------------ ------------
One year or less $ 6,288,000 $ 6,278,000
After one year through five years 26,678,000 26,184,000
After five years through ten years 54,389,000 52,136,000
After ten years 25,911,000 25,482,000
------------ ------------
$113,266,000 $110,080,000
============ ============
F-17
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3: INVESTMENTS IN DEBT AND EQUITY SECURITIES (CONTINUED)
The book value of securities pledged as collateral, to secure notes payable,
public deposits and for other purposes, amounted to $38,656,000 at December 31,
1999 and $55,125,000 at December 31, 1998. The approximate fair value of pledged
securities amounted to $37,681,000 at December 31, 1999 and $56,249,000 at
December 31, 1998.
Gross gains of $303,000, $43,000, and $131,000 and gross losses of $37,000,
$2,000, and $46,000 resulting from sales of available-for-sale securities were
realized for 1999, 1998 and 1997, respectively.
The Company redesignated available-for-sale securities with an aggregate
amortized cost of $15,405,000 and $5,061,000 to the held-to-maturity portfolio
during 1999 and 1997, respectively.
The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is
required to maintain an investment in capital stock of the FHLB. As a member,
the Bank has access to a $40,100,000 credit line which is secured by investment
securities. No ready market exists for the FHLB stock, and it has no quoted
market value. Such stock is recorded at cost and reported as other investments.
As discussed in Note 6, the Bank had advances outstanding at December 31, 1999
and 1998 of $28,600,000 and $10,000,000, respectively.
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans include:
1999 1998
---- ----
Commercial $ 133,978,000 $ 105,618,000
Real estate mortgage 5,780,000 4,101,000
Real estate construction 22,012,000 12,881,000
Consumer 22,855,000 24,595,000
------------- -------------
184,625,000 147,195,000
Allowance for loan losses (2,892,000) (2,678,000)
------------- -------------
Net loans $ 181,733,000 $ 144,517,000
============= =============
F-18
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 2,678,000 $ 2,125,000 $ 1,754,000
----------- ----------- -----------
Allowance for loan losses of acquired
institution -- 350,000 --
----------- ----------- -----------
Charge offs (27,000) (86,000) (24,000)
Recoveries 14,000 11,000 35,000
----------- ----------- -----------
Net recoveries (13,000) (75,000) 11,000
Provision charged to operating expenses 227,000 278,000 360,000
----------- ----------- -----------
Balance, end of year $ 2,892,000 $ 2,678,000 $ 2,125,000
=========== =========== ===========
</TABLE>
Impaired loans totaled $2,985,000 and $2,380,000 at December 31, 1999 and
1998, respectively. An allowance for loan losses of $450,000 and $362,000
related to impaired loans at December 31, 1999 and 1998, respectively. At
December 31, 1998 and 1997, all impaired loans had allocated allowances.
Interest of $261,000 and $158,000 was recognized on average impaired loans
of $2,851,000 and $1,612,000 for 1999 and 1998, respectively. Interest of
$254,000 and $153,000 was recognized on impaired loans on a cash basis during
1999 and 1998, respectively.
NOTE 5: PREMISES AND EQUIPMENT
Major classifications of premises and equipment, stated at cost, at
December 31, were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 150,000 $ 150,000
Building 750,000 750,000
Leasehold improvements 2,058,000 2,056,000
Furniture and equipment 3,364,000 3,082,000
----------- -----------
6,322,000 6,038,000
Less accumulated depreciation and amortization (3,013,000) (2,762,000)
----------- -----------
Net premises and equipment $ 3,309,000 $ 3,276,000
=========== ===========
</TABLE>
F-19
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 6: DEPOSITS
Interest bearing deposits in denominations of $100,000 or more were
$41,976,000 on December 31, 1999 and $44,231,000 on December 31, 1998.
At December 31, 1999, the scheduled maturities of time deposits were as
follows:
2000 $68,729,000
2001 4,957,000
2002 1,644,000
2003 621,000
2004 and thereafter 579,000
-----------
$76,530,000
NOTE 7: NOTES PAYABLE
Notes payable consisted of the following components:
1999 1998
---- ----
Advances from FHLB $28,600,000 $10,000,000
----------- -----------
Total notes payable $28,600,000 $10,000,000
=========== ===========
The Bank entered into two $10,000,000 advance agreements with the FHLB in
December 1999 bearing interest at a rate of 5.89% and maturing on February and
March 2000. Additionally, the bank entered into a $5,000,000 advance agreement
dated January 1997 bearing interest at a rate of 6.5% and matured January 14,
2000. As of December 31, 1999 the bank also has a line of credit with $3,600,000
outstanding, bearing interest at a daily floating rate, (5.00% at December 31,
1999), maturing July 14, 2000. The advances are secured by pledges of securities
as discussed in Note 3.
The Company has an unused $3,000,000 revolving line of credit with a
financial institution, with interest payable quarterly at Prime, adjusted the
same day a rate change occurs. The line of credit is secured by the pledge of
all of the shares of capital stock of the Bank and contains standard
representations, warranties and financial covenants.
F-20
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 8: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S DEBENTURES
1999 1998
---- ----
Guaranteed Preferred Beneficial Interests In
Company's Debentures $10,304,000 $10,304,000
=========== ===========
On October 14, 1998, the Company formed a wholly-owned business trust (the
Trust) to issue preferred securities representing undivided beneficial interests
in the assets of the Trust. The sole assets of the Trust are $10.3 million
aggregate principal amount of the Company's 9.00% Subordinated Debenture Notes
due December 17, 2028, which are redeemable on or after December 17, 2003. Such
securities qualify as Tier I Capital for regulatory purposes.
NOTE 9: INCOME TAXES
The provision for income taxes consists of:
1999 1998 1997
---- ---- ----
Taxes currently payable $ 395,000 $ 607,000 $ 1,067,000
Deferred income taxes (19,000) (230,000) (216,000)
--------- --------- -----------
$ 376,000 $ 377,000 $ 851,000
========= ========= ===========
F-21
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 9: INCOME TAXES (CONTINUTED)
The tax effects of temporary differences related to deferred taxes shown in
the December 31, balance sheets are:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 842,000 $ 761,000
Accrued expenses 32,000 160,000
Deferred loan fees 219,000 167,000
Deferred compensation 51,000 37,000
Other real estate owned -- 94,000
Unrealized loses on available-for-sale securities 1,183,000 --
State net operating loss carryforward 87,000 --
----------- -----------
2,414,000 1,219,000
----------- -----------
Deferred tax liabilities:
Federal Home Loan Bank Stock (79,000) (47,000)
Furniture, equipment, and improvements (48,000) (65,000)
Unrealized gains on available-for-sale securities -- (365,000)
Other -- (27,000
----------- -----------
(127,000) (504,000)
----------- -----------
Net deferred tax asset $ 2,287,000 $ 715,000
=========== ===========
</TABLE>
A reconciliation of income tax expenses at the statutory rate to the
Company's actual income tax is shown below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed at the statutory rate (34%) $ 627,000 $ 685,000 $ 1,016,000
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest (387,000) (367,000) (328,000)
Amortization of excess of investment
in subsidiary over net assets acquired 79,000 79,000 79,000
State income taxes, net of federal tax
benefit (51,000) 16,000 17,000
Nondeductible interest 40,000 42,000 30,000
Other, net 68,000 (78,000) 37,000
--------- --------- -----------
Income tax expense $ 376,000 $ 377,000 $ 851,000
========= ========= ===========
</TABLE>
The Company has a net operating loss carryforward available to offset
Colorado state taxable income of $1,823,000 which expires in 2019.
F-22
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 10: EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share calculation for income before extraordinary item is shown
below for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
1999
----
Income before extraordinary item $1,468,000 $2,352,540
Basic earnings per share $ .62
========
Effect of dilutive securities:
Stock options -- 296,933
---------- ----------
Diluted earnings per share $1,468,000 2,649,473 $ .55
========== ========== ========
1998
----
Income before extraordinary item $1,637,000 2,339,119
Basic earnings per share $ .70
========
Effect of dilutive securities:
Stock options -- 283,634
---------- ----------
Diluted earnings per share $1,637,000 2,622,753 $ .62
========== ========== ========
1997
----
Income before extraordinary item $2,136,000 2,317,056
Basic earnings per share $ .92
========
Effect of dilutive securities:
Stock options -- 217,848
---------- ----------
Diluted earnings per share $2,136,000 2,534,904 $ .84
========== ========== ========
</TABLE>
F-23
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 11: COMMITMENTS AND CREDIT RISKS
The Bank grants commercial, residential, and other installment loans to
customers throughout the state of Colorado and, in addition, invests in
municipal obligations of various entities in the state.
Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate, and residential real estate. Management uses
the same credit policies in granting lines of credit as it does for on balance
sheet instruments.
At December 31, 1999 and 1998, the Bank had granted unused lines of credit
to borrowers aggregating approximately $75,214,000 and $58,719,000,
respectively. At December 31, 1999, unused lines of credit consisted of
approximately $72,151,000 for commercial lines and $3,063,000 for open-end
consumer lines.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
The Bank had total outstanding letters of credit amounting to $2,034,377 and
$1,318,000 at December 31, 1999 and 1998, respectively, with terms ranging from
15 days to two years.
At December 31, 1999 and 1998, the Bank had outstanding commitments to
originate loans aggregating approximately $11,510,500 and $12,780,000,
respectively. The commitments extended over varying periods of time with the
majority being disbursed within a one-year period.
F-24
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 12: OPERATING LEASES
The Bank leases numerous premises under noncancelable leases which expire
from 2004 to 2008. Several of the leases contain various renewal option clauses
for additional terms and provide for periodic rental adjustments based on the
Consumer Price Index.
The estimated future minimum lease payments under noncancelable operating
leases at December 31, 1999 were as follows:
2000 616,000
2001 593,000
2002 559,000
2003 556,000
2004 380,000
Thereafter 260,000
----------
Total future minimum lease payment $2,964,000
==========
Total rental expense for all operating leases (net of month-to-month
sublease rental income in 1995), including certain cancelable equipment leases,
was $690,000, $614,000, and $509,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
NOTE 13: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS
The Company provides a 401(k) profit sharing plan for its employees,
contributing annually to a profit sharing trust. All employees who are at least
21 years old and who have been employed by the Company for at least one year are
eligible to participate. Total contributions were approximately $304,000,
$226,000, and $195,000 in 1999, 1998 and 1997, respectively. Effective for the
year beginning January 1, 1999 the Company matches 100% of the first 3% of the
participants contributions and 50% of the next 2% of participant contributions.
These employer matching contributions are 100% vested. Prior to 1999, the
Company matched 50% of the first 6% of the participants' contributions.
Additional bonus profit sharing contributions may be made at the discretion of
the Board of Directors. The Company's pre 1999 and all bonus profit sharing
matching contributions are 20% vested after the participant has completed two
years of service, with 20% incremental increases in vesting for each of the next
four years
F-25
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 13: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS (CONTINUED)
During the year ended December 31, 1994, the Company adopted a Non-Employee
Director Equity Compensation Plan (Compensation Plan) effective January 1, 1995.
The Compensation Plan provides for the initial authorization of 50,000 shares of
common stock. Under the provisions of the Compensation Plan, the directors are
compensated $7,500 for 1999 and $6,000 annually for 1998 and 1997, respectively,
provided certain performance measures are met. The directors have the option of
accepting the Company's common stock in lieu of cash compensation. If the
director opts for common stock, the number of shares issued is determined on the
first business day of the year. The director has voting rights on the common
stock issued as compensation; however, the common stock is restricted until the
director has met all performance measures. In January 1999, 1998 and 1997, the
Company issued 2,500, 2,000, and 3,750 common shares, respectively, pursuant to
the Compensation Plan at exercise prices of $12.00, $24.00 and $16.00,
respectively.
The Company adopted the Equity Incentive Plan (Incentive Plan) in December
1992 for certain key employees of the Company. The Incentive Plan provides for
the authorization of 624,000 shares of common stock, plus an additional
authorization of one-half percent of the outstanding shares of common stock as
of each succeeding annual anniversary of the effective date of the Incentive
Plan. Options issued within the Incentive Plan vest in three equal increments on
the date of grant and the first two anniversaries thereof, and expires ten years
after date of grant.
A summary of the status of the Incentive Plan at December 31, and changes
during the year is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 479,200 $ 6.16 443,400 $ 5.61 429,200 $ 4.92
Granted 23,400 12.50 43,700 11.38 40,600 11.75
Exercised (26,900) 5.20 (6,500) 3.97 (22,800) 4.16
Forfeited (1,900) 9.48 (1,400) 5.19 (3,600) 6.13
-------- -------- -------- -------- -------- --------
Outstanding, end of year 473,800 $ 6.50 479,200 $ 6.16 443,400 $ 5.61
======== ======== ======== ======== ======== ========
Options exercisable, end of 444,000 436,734 407,500
year
</TABLE>
F-26
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 13: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS (CONTINUED)
The fair value of each option granted is estimated on the date of the grant
using the minimum value method with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend per share $ 0 $ 0 $ 0
Risk-free interest rate 6.55% 4.75% 5.71%
Expected life of options 10 years 10 years 9 years
Weighted-average fair value of
options granted during year $ 7.86 $ 5.09 $ 5.71
</TABLE>
The following table summarizes information about stock options under the
Incentive Plan outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$4.50 154,000 3 years $ 4.50 154,000 $ 4.50
$4.00 14,000 4 years $ 4.00 14,000 $ 4.00
$3.75 to $3.81 24,000 5 years $ 3.76 24,000 $ 3.76
$5.38 152,300 6 years $ 5.38 152,300 $ 5.38
$7.63 24,100 7 years $ 7.63 24,100 $ 7.63
$11.75 39,400 8 years $ 11.75 39,400 $ 11.75
$11.38 42,600 9 years $ 11.38 28,400 $ 11.38
$12.50 23,400 10 years $ 12.50 7,800 $ 12.50
</TABLE>
The Company also adopted a Nonemployee Directors' Stock Option Plan
(Directors' Plan) in December 1992. An aggregate of 22,000 shares of common
stock are reserved for issuance under the Directors' Plan. Nonemployee directors
are automatically granted options to purchase 500 common shares during each
fiscal year following election to the Board. The Board of Directors, or a
committee consisting of such Board members or other persons as may be appointed
by the Board, administer the Directors' Plan. The Directors' Plan is currently
administered by the Board of Directors. Each option under the Directors' Plan
expires five years from the date of grant.
F-27
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 13: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS (CONTINUED)
A summary of the status of the Directors' Plan at December 31, and changes
during the year is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 9,000 $ 8.74 9,000 $ 7.14 12,500 $ 10.17
Granted 2,000 13.13 2,000 12.50 2,000 12.07
Exercised (2,500) 4.95 (1,500) 4.13 (5,500) 4.48
Forfeited (500) 12.07 (500) 800 -- --
------ -------- ------ -------- ------ --------
Outstanding, end of year 8,000 $ 10.86 9,000 $ 8.74 9,000 $ 7.14
====== ======== ====== ======== ====== ========
Options exercisable, end of
year 6,000 7,000 7,000
</TABLE>
The fair value of each option granted is estimated on the date of the grant
using the minimum value method with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend per share $ 0 $ 0 $ 0
Risk-free interest rate 6.55% 4.75% 5.71%
Expected life of options 4 years 5 years 4 years
Weighted-average fair value of
options granted during year $ 5.05 $ 3.64 $ 2.87
</TABLE>
F-28
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 13: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options under the
Directors' Plan outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$5.50 1,000 1 years $ 5.50 1,000 $ 5.50
$8.00 1,500 2 years $ 8.00 1,500 $ 8.00
$12.07 1,500 3 years $ 12.07 1,500 $ 12.07
$12.50 2,000 4 years $ 12.50 2,000 $ 12.50
$13.13 2,000 5 years $ 13.13 -- $ --
</TABLE>
In May 1996, the Company adopted an "Option Bonus Plan" (Bonus Plan). The
exercise price on all options is equal to the market price of the common stock
on the date of grant. The option period expires ten years from the date the
options were granted. The options vest and are exercisable six months after they
are granted. The maximum number of shares that may be issued pursuant to the
exercise of these options is 300,000 shares.
A summary of the status of the Bonus Plan at December 31, and changes during
the year is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 207,715 $ 10.07 78,586 $ 7.93 72,802 $ 7.63
Granted 4,851 $ 13.13 129,129 11.38 5,784 11.75
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- --
------- -------- ------- -------- ------- --------
Outstanding, end of year 212,566 $ 10.15 207,715 $ 10.07 78,586 $ 7.03
======= ======== ======= ======== ======= ========
Options exercisable, end of 207,715 78,586 72,802
year
</TABLE>
F-29
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 13: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS (CONTINUED)
The fair value of each option granted is estimated on the date of the grant
using the minimum value method with the following weighted-average assumptions:
1999 1998
---- ----
Dividend per share $ 0 $ 0
Risk-free interest rate 6.55% 4.75%
Expected life of options 4 years 4 years
Weighted-average fair value of
options granted during year $ 5.05 $ 2.87
The following table summarizes information about stock options under the
Bonus Plan outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$7.63 72,802 7 years $ 7.63 72,802 $ 7.63
$11.75 5,784 8 years $ 11.75 5,784 $ 11.75
$11.38 129,129 9 years $ 11.38 129,129 $ 11.38
$12.50 4,851 10 years $ 13.13 -- $ --
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock option plans, and no compensation cost has been recognized for the
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates using Statement of
Financial Accounting Standards No. 123, the Company's net income would have
decreased by approximately $102,000, $368,000, and $172,000 in 1999, 1998 and
1997, respectively. In addition, the Company's basic earnings per share would
have decreased by $.04 per share, $.16 per share, and $.07 per share in 1999,
1998 and 1997, respectively. Diluted earnings per share would have decreased
$.04 per share, $.14 per share, and $.07 per share, respectively.
F-30
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 14: OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Professional services $ 990,000 $ 729,000 $ 586,000
Credit card 445,000 352,000 309,000
Legal and accounting 210,000 253,000 271,000
Advertising and promotion 263,000 286,000 200,000
Postage and delivery 238,000 176,000 150,000
Software maintenance and amortization 102,000 164,000 140,000
Service charges 199,000 131,000 129,000
Supplies 234,000 191,000 112,000
Insurance and bonds 140,000 127,000 106,000
Telephone 165,000 107,000 88,000
Printing 192,000 124,000 86,000
Travel and entertainment 122,000 114,000 67,000
Dues and subscriptions 113,000 80,000 67,000
Deposit insurance 31,000 23,000 19,000
Amortization of debt issuance costs 76,000 2,000 --
Other operating expenses 448,000 328,000 188,000
Merger cost 325,000 -- --
---------- ---------- ----------
$4,293,000 $3,187,000 $2,518,000
========== ========== ==========
</TABLE>
NOTE 15: BUSINESS ACQUISITIONS
On December 17, 1998, the Company acquired all the outstanding shares of
Lakewood State Bank common stock for $8,350,000, including $7,515,000 in cash
and $835,000 held on deposit at the Bank. The acquisition has been accounted for
as a purchase by recording the assets and liabilities of the acquiree at their
estimated market values at the acquisition date. The consolidated operations of
the Company include the operations of the acquiree, which was liquidated into
another branch bank from the acquisition date.
F-31
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 16: TRANSACTIONS WITH RELATED PARTIES
At December 31, 1999 and 1998, the Bank had loans outstanding to
shareholders, executive officers, and directors of the Company and their
affiliates, in the amount of $3,306,000 and $3,341,000, respectively. New loans
made to shareholders, executive officers, and directors of the Company and their
affiliates approximated $1,060,000 and $1,510,000, and repayments approximated
$1,095,000 and $344,000 for the years ended December 31, 1999 and 1998,
respectively.
In management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral) as those
prevailing at the time of comparable transactions with other persons. Further,
in management's opinion, these loans did not involve more than normal risk of
collectability or present other unfavorable features.
From time to time, the Bank purchases loans from a locally owned mortgage
company until the mortgage company sells the loans into the secondary mortgage
market. The loans are then sold back to the mortgage company. Initially, the
Bank receives interest during its holding period of prime plus .50%. All
origination fees and interest on the loan in excess of the rate payable to the
Bank are retained by the mortgage company. If the mortgage is not sold within
specified periods, the Bank is entitled to receive all of the interest paid on
the mortgage from inception and may be entitled to receive all or a portion of
the origination fees. The mortgage company provides loan servicing during the
period that the mortgage is held by the Bank. During the years ended December
31, 1999, 1998 and 1997, the Bank earned interest income on such loans of
$28,000, $144,000, and $59,000, respectively. During the years ended December
31, 1999, 1998 and 1997, the Bank purchased loans in the amounts of $9,389,000,
$48,364,000, and $5,762,000 and sold loans in the amount of $13,674,000,
$44,079,000, and $4,509,000, respectively. All loans sold back to the mortgage
company are without recourse to the Bank. The Chairman of the Board of the Bank
is a director and treasurer of the mortgage company.
F-32
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 17: ADDITIONAL CASH FLOW INFORMATION
The Company purchased all of the capital stock of Lakewood State Bank for
$8,350,000 ($7,515,000 in cash and $835,000 held on deposit at the Bank). In
conjunction with the acquisition, assets acquired and liabilities assumed are as
follows:
1998
----
Fair value of assets acquired $50,020,000
Cash paid for the capital stock (7,515,000)
-----------
Liabilities assumed $42,505,000
===========
ADDITIONAL CASH PAYMENT INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income taxes paid $ 783,000 $ 638,000 $ 819,000
=========== =========== ===========
Interest paid $ 9,540,000 $ 5,900,000 $ 5,012,000
=========== =========== ===========
NON-CASH INVESTING ACTIVITIES
Reclassification of securities from
available-for-sale to held-to-maturity
at fair value $15,434,000 $ 0 $ 5,092,000
=========== =========== ===========
Reclassification of securities from
held-to-maturity to available-for-sale
at fair value $ 6,940,000 $ 0 $ 0
=========== =========== ===========
</TABLE>
F-33
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 18: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Financial statements of the parent company, Union Bankshares, Ltd., are
shown below and should be read in conjunction with the consolidated financial
statements.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
------
1999 1998
---- ----
<S> <C> <C>
Cash $ 1,545,000 $ 2,432,000
Available-for-sale securities 3,612,000 2,685,000
Excess of cost over fair value of net
assets acquired, net of amortization 2,268,000 2,494,000
Investment in subsidiary 21,887,000 22,550,000
Accrued interest receivable 53,000 37,000
Income taxes receivable 64,000 33,000
Other assets 677,000 577,000
------------ -----------
Total Assets $ 30,106,000 $30,808,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Cumulative Trust Preferred Securities $ 10,304,000 $10,304,000
Accrued interest payable 39,000 36,000
Other liabilities 380,000 124,000
------------ -----------
Total Liabilities 10,723,000 10,464,000
------------ -----------
STOCKHOLDERS' EQUITY
Common stock 2,000 2,000
Additional paid-in capital 9,822,000 9,639,000
Unrealized gains on subsidiary's available-for-sale securities (2,005,000) 643,000
Retained earnings 11,564,000 10,060,000
------------ -----------
Total Stockholders' Equity 19,383,000 20,344,000
------------ -----------
Total Liabilities and Stockholders' Equity $ 30,106,000 $30,808,000
============ ===========
</TABLE>
F-34
<PAGE>
UNION BANKSHARES, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 18: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiary $ 1,400,000 $ 1,000,000 $1,600,000
Interest income 172,000 157,000 224,000
----------- ----------- ----------
Total operating income 1,572,000 1,157,000 1,824,000
----------- ----------- ----------
OPERATING EXPENSES
Interest 925,000 157,000 268,000
Amortization of excess of investment in
subsidiary over net assets acquired 226,000 226,000 226,000
Salaries and employee benefits 696,000 374,000 479,000
Occupancy and equipment 88,000 36,000 13,000
Other 919,000 518,000 305,000
----------- ----------- ----------
Total operating expenses 2,854,000 1,311,000 1,291,000
----------- ----------- ----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY, INCOME TAX
BENEFIT (1,282,000) (154,000) 533,000
EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY 2,027,000 1,424,000 1,337,000
INCOME TAX BENEFIT 723,000 367,000 266,000
----------- ----------- ----------
NET INCOME $ 1,468,000 $ 1,637,000 $2,136,000
=========== =========== ==========
</TABLE>
F-35
<PAGE>
UNION BANKSHARES, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 18: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,468,000 $ 1,637,000 $ 2,136,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
(Gains) losses on repurchase of notes payable -- -- --
Amortization 302,000 229,000 206,000
Deferred taxes -- 26,000 (3,000)
Change in:
Other assets (171,000) (574,000) 26,000
Accrued interest receivable (16,000) 2,000 (4,000)
Due from subsidiary -- -- 7,000
Equity in undistributed earnings of subsidiary (1,985,000) (1,403,000) (1,337,000)
Other liabilities 259,000 (170,000) 164,000
----------- ------------ -----------
Net cash (used in) provided by operating activities (143,000) (253,000) 1,195,000
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (3,612,000) (2,686,000) (3,704,000)
Capital contribution to banking subsidiary 2,685,000 (7,000,000) --
Proceeds from sales of available-for-sale securities -- -- --
Proceeds from maturities of available-for-sale securities -- 3,700,000 3,460,000
----------- ------------ -----------
Net cash (used in) investing activities (927,000) (5,986,000) (244,000)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of trust preferred securities -- 10,304,000 --
Proceeds from notes payable -- -- --
Principal repayments of notes payable -- (2,000,000) (1,500,000)
Proceeds from issuance of common stock 183,000 56,000 149,000
----------- ------------ -----------
Net cash provided by (used in) financing activities 183,000 8,360,000 (1,351,000)
----------- ------------ -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (887,000) 2,121,000 (400,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 2,432,000 311,000 711,000
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,545,000 $ 2,432,000 $ 311,000
=========== ============ ===========
</TABLE>
F-36
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 19: REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weighing, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table following) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to adjusted total assets (as defined). Management believes, as of
December 31, 1999, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation (FDIC) categorized the Company and the Bank as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Company and the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the category.
F-37
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 19: REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table. In accordance with FDIC regulations, no amount has been
deducted from capital for interest rate risk.
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Total risk-based capital
(to risk-weighted assets):
Consolidated $28,393,000 12.7% $17,916,000 8.0% $22,394,000 10.0%
Bank $22,309,000 10.1% $17,622,000 8.0% $22,028,000 10.0%
Tier I risk-based capital (to risk-weighted assets):
Consolidated $22,339,000 10.0% $ 8,958,000 4.0% $13,437,000 6.0%
Bank $19,554,000 8.9% $ 8,811,000 4.0% $13,217,000 6.0%
Tier I leverage capital (to adjusted total assets):
Consolidated $22,339,000 6.4% $13,929,000 4.0% $17,411,000 5.0%
Bank $19,554,000 5.6% $13,854,000 4.0% $17,317,000 5.0%
AS OF DECEMBER 31, 1998:
Total risk-based capital
(to risk-weighted assets):
Consolidated $25,387,000 15.2% $13,347,000 8.0% $16,684,000 10.0%
Bank $19,860,000 11.8% $13,444,000 8.0% $16,805,000 10.0%
Tier I risk-based capital (to risk-weighted assets):
Consolidated $23,357,000 14.0% $ 6,673,000 4.0% $10,010,000 6.0%
Bank $17,752,000 10.6% $ 6,722,000 4.0% $10,083,000 6.0%
Tier I leverage capital (to adjusted total assets):
Consolidated $23,357,000 8.3% $11,261,000 4.0% $14,076,000 5.0%
Bank $17,752,000 6.8% $10,457,000 4.0% $13,072,000 5.0%
</TABLE>
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At December 31, 1999,
approximately $1,840,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
F-38
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount approximates fair
value.
INVESTMENT SECURITIES
Fair values for investment securities equal quoted market prices, if
available. If quoted market prices are not available, fair values are estimated
based on quoted market prices of similar securities.
LOANS
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Loans with similar
characteristics were aggregated for purposes of the calculations. The carrying
amount of accrued interest approximates its fair value.
MORTGAGE LOANS HELD FOR SALE
Fair values of mortgage loans held for sale is estimated using the quoted
market prices for securities backed by similar loans, adjusted for differences
in loan characteristics.
DEPOSITS
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the reporting
date (i.e., their carrying amount). The fair value of fixed-maturity time
deposits is estimated using a discounted cash flow calculation that applies the
rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
NOTES PAYABLE
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
F-39
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S DEBENTURES
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit and lines of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate or otherwise settle the
obligations with the counterparties at the reporting date.
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which method involves significant
judgments by management and uncertainties. Fair value is the estimated amount at
which financial assets or liabilities could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Because no market exists for certain of these financial instruments and because
management does not intend to sell these financial instruments, the Company does
not know whether the fair values shown below represent values at which the
respective financial instruments could be sold individually or in the aggregate.
F-40
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------------- -----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 15,493,000 $ 15,493,000 $ 18,914,000 $ 18,914,000
Federal funds sold -- -- 26,505,000 26,505,000
Federal funds purchased 8,500,000 8,500,000 -- --
Available-for-sale securities 110,080,000 110,080,000 77,594,000 77,594,000
Held-to-maturity securities 32,908,000 32,133,000 27,469,000 28,420,000
Other investments 1,984,000 1,984,000 988,000 988,000
Interest receivable 2,586,000 2,586,000 1,542,000 1,542,000
Loans, net of allowance for loan losses 181,733,000 181,537,000 144,517,000 152,234,000
Mortgage loans held for sale -- -- 4,285,000 4,285,000
FINANCIAL LIABILITIES
Deposits 290,055,000 290,118,000 271,650,000 267,851,000
Notes payable 28,600,000 28,600,000 10,000,000 10,000,000
Guaranteed Preferred Beneficial Interests
In Company's Debentures 10,304,000 10,304,000 10,304,000 10,304,000
Federal funds sold 8,500,000 8,500,000 -- --
Interest payable 382,000 382,000 471,000 471,000
UNRECOGNIZED FINANCIAL INSTRUMENTS
(net of contract amount):
Commitments to extend credit -- -- -- --
Letters of credit -- -- -- --
Lines of credit -- -- -- --
</TABLE>
F-41
<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 21: SUBSEQUENT EVENT
On August 9, 1999, the Company entered into an agreement providing for the
acquisition of Union Bankshares, Ltd. by Gold Banc Corporation, Inc. The
agreement provided for the acquisition of all the common stock of the Company
for a purchase price of $23.05 per share, to be paid in shares of Gold Banc
common stock and the assumption of all outstanding options. The exchange ratio
was to be determined by dividing $23.05 by the average price of Gold Banc common
stock during the 10-day trading period ending three days prior to closing,
unless the average price is less than $13 or greater than $16, in which case the
average price shall be fixed at $13 or $16, respectively. If the average price
of Gold Banc common stock fell below $11.00 for a period of 10 trading days,
ending on the day immediately prior to the meeting at which the merger would
have been considered by the Company's stockholders, the Company would have been
entitled to terminate the transaction within five days following the meeting of
stockholders. On March 17, 2000 the Company and Gold Banc agreed to mutually
terminate the proposed merger.
F-42
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNION BANKSHARES, LTD.
Date: March 30, 2000 By: /S/ CHARLES R. HARRISON
-------------------------
Charles R. Harrison, Chairman of the
Board, Chief Executive Officer and a
Director
In accordance with the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ CHARLES R. HARRISON Chairman of the Board, Chief March 30, 2000
- -------------------------- Executive Officer and a Director
Charles R. Harrison (Principal Executive Officer)
/S/ BRUCE E. HALL Vice President-Finance, Secretary, March 30, 2000
- -------------------------- Treasurer and a Director (Principal
Bruce E. Hall Financial and Accounting Officer
/S/ WAYNE T. BIDDLE Director March 30, 2000
- --------------------------
Wayne T. Biddle
/S/ JERROLD B. EVANS Director March 30, 2000
- --------------------------
Jerrold B. Evans
/S/ HAROLD R. LOGAN, JR. Director March 30, 2000
- --------------------------
Harold R. Logan, Jr.
/S/ RALPH D. JOHNSON Director March 30, 2000
- --------------------------
Ralph D. Johnson
/S/ RICHARD C. SAUNDERS Director March 30, 2000
- --------------------------
Richard C. Saunders
/S/ HERMAN J. ZUECK Director March 30, 2000
- --------------------------
Herman J. Zueck
S-1
<PAGE>
EXHIBIT DESCRIPTION AND INDEX
Exhibit
NUMBER DESCRIPTION
3.1 Certificate of Incorporation of Union Bankshares, Ltd./*/
3.2 Certificate of Amendment to Certificate of Incorporation of Union
Bankshares, Ltd./+/
3.3 Bylaws of Union Bankshares, Ltd./*/
4.1 Form of Subordinated Indenture dated to be entered into between the
Registrant and American Securities Transfer & Trust, Inc., as
Indenture Trustee/+/
4.2 Form of Junior Subordinated Debenture (included as an exhibit to
Exhibit 4.1
4.3 Certificate of Trust of Union Bankshares Capital Trust I/+/
4.4 Trust Agreement of Union Bankshares Capital Trust I dated as of
October 14, 1998/+/
4.5 Form of Amended and Restated Trust Agreement of Union Bankshares
Capital Trust I/+/
4.6 Form of Preferred Security Certificate of Union Bankshares Capital
Trust I (included as an exhibit to Exhibit 4.5)
4.7 Form of Preferred Securities Guarantee Agreement/+/
4.8 Form of Agreement as to Expenses and Liabilities/+/
10.1 Certificate of Incorporation of Union Bank & Trust Company/*/
10.2 Bylaws of Union Bank & Trust Company/*/
10.3 Lease Agreement, dated July 1, 1994, between Lichtenberg Corporation
of Delaware and the Bank/***/
10.4 Form of Employment Agreement/*/
10.5 Equity Incentive Plan/*/
10.6 Nonemployee Directors' Stock Option Plan/*/
10.7 Agreement between Union Bank & Trust and Colorado Bankers Mortgage,
Inc./*/
10.8 Nonemployee Directors Equity Compensation Plan/**/
10.9 Amended Shareholders' Agreement/**/
10.10 Agreement between Union Bank & Trust and Colorado National
Bank /***/
E-1
<PAGE>
10.11 Loan Agreement between Union Bankshares, Ltd., Union Bank & Trust
and Boatmen's First National Bank of Kansas City/****/
10.12 Line of Credit Agreement between Union Bankshares, Ltd., Union
Bank & Trust and Boatmen's First National Bank of Kansas City/*****/
10.13 Option Bonus Plan/*****/
10.14 Agreement and Plan of Merger, dated August 27, 1998, among Union
Bank & Trust Company, LSB Acquisition Corp. and Lakewood State
Bank/+/
10.15 Loan Agreement among Union Bankshares, Ltd., Union Bank & Trust and
Exchange National Bank/++/
10.16 Agreement and Plan of Reorganization, dated August 9, 1999, among
Gold Banc Corporation, Inc., Gold Banc Acquisition Corporation
VIII, Inc., and Union Bankshares, Ltd./+++/
10.17 Mutual Termination Agreement, dated March 17, 2000, among Gold Banc
Corporation, Inc., Gold Banc Acquisition Corporation VIII, Inc. and
Union Bankshares, Ltd./++++/
21 Subsidiaries of the Registrant/******/
23.1 Consent of Baird, Kurtz & Dobson/******/
- ------------------------
/*/ Incorporated by reference to the Company's S-1 Registration Statement
filed with the Commission on January 6, 1993, as amended (Reg.
No. 33-56736).
/**/ Incorporated by reference to the Company's Form 10-KSB filed with the
Commission on March 31, 1994.
/***/ Incorporated by reference to the Company's Form 10-KSB filed with the
Commission on March 31, 1995.
/****/ Incorporated by reference to the Company's Form 8-K filed with the
Commission on March 1, 1996.
/*****/ Incorporated by reference to the Company's Form 10-KSB filed with the
Commission on March 31, 1997.
/******/ Filed herewith.
/+/ Incorporated by reference to the Company's S-2 Registration Statement
filed with the Commission on October 26, 1998, as amended (Reg.
No. 333-66153).
/++/ Incorporated by reference to the Company's 10-KSB filed with the
Commission on March 31, 1999.
/+++/ Incorporated by reference to the Company's 10-QSB filed with the
Commission on August 13, 1999.
/++++/ Incorporated by reference to the Company's Form 8-K filed with the
Commission on March 17, 2000.
E-2
Subsidiaries of Registrant:
Union Bank & Trust
Union Bankshares Capital Trust I
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We consent to incorporation by reference in the registration statements of
UNION BANKSHARES, LTD. on Form S-8 relating to the Company's Equity Incentive
Plan, the Options Bonus Plan, the Equity Compensation Plan for Nonemployee
Directors, the Nonemployee Directors' Stock Option Plan and the Profit Sharing
401(k) Plan of our report dated February 25, 2000, except for Note 21, as to
which the date is March 17, 2000, relating to the consolidated balance sheets of
UNION BANKSHARES, LTD. as of December 31, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for the three years then ended, which report appears in the
December 31, 1999 annual report on Form 10-KSB of UNION BANKSHARES, LTD.
/s/ Baird, Kurtz & Dobson
BAIRD, KURTZ & DOBSON
Denver, Colorado
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-30-1999
<CASH> 15,493,000
<INT-BEARING-DEPOSITS> 201,663,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 110,080,000
<INVESTMENTS-CARRYING> 144,972,000
<INVESTMENTS-MARKET> 144,197,000
<LOANS> 184,625,000
<ALLOWANCE> (2,892,000)
<TOTAL-ASSETS> 358,586,000
<DEPOSITS> 290,055,000
<SHORT-TERM> 37,100,000
<LIABILITIES-OTHER> 1,744,000
<LONG-TERM> 10,304,000
0
0
<COMMON> 9,824,000
<OTHER-SE> 11,564,000
<TOTAL-LIABILITIES-AND-EQUITY> 358,586,000
<INTEREST-LOAN> 15,348,000
<INTEREST-INVEST> 8,489,000
<INTEREST-OTHER> 378,000
<INTEREST-TOTAL> 24,215,000
<INTEREST-DEPOSIT> 7,165,000
<INTEREST-EXPENSE> 9,451,000
<INTEREST-INCOME-NET> 14,764,000
<LOAN-LOSSES> 227,000
<SECURITIES-GAINS> 266,000
<EXPENSE-OTHER> 14,314,000
<INCOME-PRETAX> 1,844,000
<INCOME-PRE-EXTRAORDINARY> 1,844,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,468,000
<EPS-BASIC> .62
<EPS-DILUTED> .55
<YIELD-ACTUAL> 8.06
<LOANS-NON> 4,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,678,000
<CHARGE-OFFS> 27,000
<RECOVERIES> 14,000
<ALLOWANCE-CLOSE> 2,892,000
<ALLOWANCE-DOMESTIC> 2,862,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
